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Clauses in insurance or investment sheets, if unnoticed, cause dismay

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How many times do you read an article after reading the headline? Not many would so that. They mostly form an idea about the content of the write-up based on the headlines given. Sadly, this pattern is followed even when they put their hard-earned money.

When such individuals make investments, they put money in an instrument based on what someone (friend, relative or ‘experts’) tells them and do not read the product paper on their own. Those who do read up a bit, go through the highlighted matter or the product summary. But, there aren’t any details.

It has been said time and again and I reiterate it, always read the fineprint before investing your money. Reading the fineprint enables you to take better decision(s). This habit can also affect your strategy. Lets take a look at some instances where the fineprint can help you.

Interest (%)
Interest yield     
compounded %)
8.00 8.24
8.50 8.77
9.00 9.31
9.50 9.84
10.00 10.38

Fixed income
Whenever we make bank deposits there are two or three important aspects to consider. One is the payable and the other is interest yield on the investment. There is a difference between the two terms.

The interest rate is the contracted rate which determines the interest or return to be paid either on a quarterly, half-yearly or annual basis to the investor. Lets assume there are two institutions offering deposits. One is offering a rate of 9.50 per cent annually and the other 9.25 per cent quarterly. The effective yield on the latter will be 9.58 per cent whereas the former will have a yield of 9.50 per cent.

The table provides the interest rate and interest yield in case of one-year deposits where the interest is compounded quarterly. The interest yield is boosted when the interest payable is compounded on a quarterly basis in this instrument.

Another important aspect to look for is liquidity. Some fixed deposits have a penalty clause for premature withdrawal. Many banks deduct one per cent from the applicable rate of interest. Say you make a one-year bank deposit paying 8 per cent per annum. And the deposit is required to be withdrawn after six months. Then, the applicable rate of interest will become 7 per cent a year. After deducting the penalty of one per cent, the interest rate payable will go down further to 6 per cent a year.

Hence, it is advised that you go to banks that don’t charge penalty unless you are absolutely sure that you may not require the deposited money prematurely.

Mutual funds
Most fund houses advertise the returns their schemes generate over a certain period of time --- one year or three years. However, the caution that these are historical returns and may or may not be able to generate such returns in the future, is in fineprint and you need to know that. The companies do not advertise that upfront.

Many investors believe that are similar to fixed deposit. And so invest in funds to get assured returns. However, the reality is that mutual funds provide market-linked returns and do not assure it. Depending on the market condition, the returns can be negative as well.

Many investors burn their fingers while investing in equity. This is because they blindly follow tips from broker or rumours. Investors should know that is the most risky one but can provide high returns.

You need to exercise caution to not get swayed by market euphoria whenever you buy or sell a stock. Don’t go by recommendations or tips given by traders and brokers. Do your own home work. Stay updated by reading about the market and companies. Look at the company’s business model and then invest. Even if you have to rely on a broker’s recommendation do take a second view before putting your money.

Much that you want to insure all possible risks, you can’t do so. If policies do cover all losses, they can have restrictive clauses. Sometimes the product brochures and marketing material do not state these limitations upfront. These details are stated as exclusions in the policy document. Reading the document thoroughly or getting proper advise from the insurance distributor helps the customer know these conditions.

Home loans
Lenders may levy a fixed rate of interest or a floating rate on home loans. Some offer a combination of fixed and floating rate also, where the rate is fixed for the initial 2-3 years and moves to floating after that. Some borrowers get attracted by the low rate offered in the initial years without understanding that the rate will increase in the later years resulting in a higher financial burden.

Also in case of home loans, the borrowers must check the method of interest rate calculation. There are two. First is a daily reducing balance method and the second works on monthly reducing balance.

The first method adjusts the outstanding or principal on prepayments at any time of the month and the second method adjusts it only at the end of the month, thus increasing the interest rate burden. If you know on which method your bank adjusts prepayments, you can plan your prepayments accordingly to lower your burden.

Investing requires doing proper ground work before taking any decision. By doing so, you will not only manage your financial resources better but also reduce unwanted hassles in future.

The writer is a freelancer

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