How to identify mis-selling?

Do not fall for tall claims of high returns. Invest only if you are sure about the product

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Bangalore-based certified financial planner Anil Rego recalls how a client of his was sold a single-premium unit-linked insurance plan (Ulip) by a bank representative on the pretext of a high-return fixed deposit. Rego's client bought the argument and invested a handsome sum. It was only the following year when he got a reminder call for a premium payment that the gentleman realised he had been mis-sold the product.

Misleading instances occur more often with ignorant individuals and with those who trust their bank representatives blindly. Though there is no solution to ignorance, there are some basics you could keep in mind to identify being pitched a wrong product. Largely, salespersons push insurance products as they earn high commissions. Often, you would be recommended to an agent by a friend and the agent is then likely to say "Your friend bought it, so you should also buy". Do not buy on being pressured, especially if a friend or family member has taken an agency.

Importantly, if an agent is emphasising on just one product since it could give very high returns, this might be because he is earning high commissions. Look at the product brochure and know what you are buying. "Given that investment products from banks are few and known to most individuals - fixed deposits and recurring deposits - don't fall for claims such as this product is like a fixed deposit," warns Rego. Salespersons play the greed factor by projecting high or assured returns. No product can ever assure returns, except bank deposits.

Products, such as insurance-cum-investment ones and equity-linked savings schemes (ELSS) or the Rajiv Gandhi Equity Savings Scheme are pitched for tax benefits. From the time the Direct Taxes Code has been in the news, mutual-fund distributors have been selling ELSS saying "tax benefits may not be there from next year". Given that a huge chunk of a salaried person's tax deduction of Rs 1 lakh (under Section 80C) is taken care of by the Employees Provident Fund (EPF), one might not need all tax-saving products. Know your tax liability before blocking your money. Senior citizens and those with low income need less of tax-exempt products, anyway.

Mumbai-based certified financial planner, Kartik Jhaveri, points out that it is easy to fool potential mutual-fund investors as there are scores of schemes. "If an investor has a horizon of one or two years, that means s/he cannot take high risks. Suggesting equity or balanced funds to this person is mis-selling. At the same time, if one has a five- to eight-year horizon, suggesting debt funds is also mis-selling," he explains.

Similarly, with insurance, get the basic premise clear - you want either insurance or investment. If you are looking for insurance, purchase only plain vanilla term-plans. At present, endowment or moneyback plans earn three to five per cent and you don't want such meagre returns in the long term.

Ulips are not recommended for investment but if you still want to purchase one, go for a single-premium one as that's akin to making a lumpsum investment in a mutual fund. Just that the former is more expensive than mutual funds. "It's very tricky how insurance agents sell regular premium plans as single-premium ones for 20 to 30 per cent commissions. Once the 15-day free-look period is over, one can't even cancel the policy," says Jhaveri.