There are plethora of financial products are being sold everywhere by trusting financial companies and intermediaries while enticing you to invest in them on the pretext of tax savings, retirement planning or children’s education and marriage planning etc. Millions of well-educated people across the world are flawed and perplexed to select right financial products which could meet their financial needs and to solve their financial problems. The situation may be more worse where mislead financial ads are lured you by a lot of embellishment of the numbers are flummoxed by the high yield indicated in their posters or banners, thanks to over 3,000 actively traded stocks, hundreds of mutual funds, over 100 life insurance products in addition to hundreds of bonds, corporate fixed deposits, FDs and so on. Since our brains have limited capacities to choose the right products from abundance of choice, leads to fatigue, depression and feeling of frustration.

Products

On the other side, we make also a lot of mistakes while buying financial products in the belief that a well-known financial services firm would not cheat us and believing that it is the right one, only to find out later that it was a dud and we, hence lost our money. Ironically, we reluctant to admit our own mistakes often, we tend to put the blame on financial intermediaries and companies that sell us, thanks to sellers resort to tactics to get entice gullible people to buy the flaw product, without crossing the undefined line that constitutes mis-selling but so is mis-buying.

Consider the case of Sanjay Singhania who went to his bank to withdraw some money where he confronted with teller at bank who explained the different products offerings subjected to unsolicited investment advice. The glib talker persuaded him to invest his hard-earned savings in one of the new ULIP as a five-year scheme with a ‘guaranteed’ return of 20% to 30% while no mentioning of market risk, costs and commissions. Mr Singhania was very happy from investing in that particular ULIP (unit-linked insurance plan) with old-fashioned belief that his entrusted banker guided him into making the right decision. When the policy document was received, there was a bigger shock. He found that he had been sold a ULIP that required an investment of Rs24,000 a year for 10 years and a minimum investment period of five years. This story has a happy ending, because the investments he made from the policy proceeds are doing well, thanks to recent broad-based rally in stock market. Many like him buy financial products and make their investment decisions on brand names in banking and financial world. They, often end up doing research only when they see a loss on their books.

Finally the story of Singhania is ended up at all those savers who rely on the seller and make mistakes in buying products because they do not understand the products while investing in, or the risk involved, or they are greedy, or too trusting or do not spend time on research before making their investment decisions.

There are four reasons why we make mistakes with our money to use to buy financial products; often, repeatedly.

Financial Products treated as Consumer Durables

It is a common belief that we, often, trust big brands’ names in the consumer durable sector ,exactly the way we assume that a product of a well- known company like Maruti would be as reliable as that of ICICI. While buying manufacturing consumer durables, no salesman would tell you about the science and a method behind the technology as these can be replaced, if they found defective whereas the financial products are often weakly construed and based on mere promise of returns and performance at the time of buying.

For instance, you can test drive a car, but not a mutual fund scheme. Similarly, a defective television or refrigerator may be replaced by the manufacturer and warranty periods for the better brands are usually over a year. But, it can’t be done with a mis-bought bond or fund. Most savers learn this bitter truth after they lose money.

Obligation to close friends and relatives

You tend to buy an arbitrary insurance policy because the agent was really persuasive or some uncle (or dad’s close friend) happened to be an agent and sold you a policy to secure your future. You tend to buy mutual funds, because the poster on the road showed you’re a fortune and an opportunity you cannot miss! Your decisions are based on your friends’ recommendations and what you see the television or read on the internet and newspapers. You keep buying or investing for all the wrong reasons-like pressure from a family agent (who is an uncle/aunty), a perceived need to save tax etc. and at the end, you call it our “portfolio”. Now you could have reasons that agent was so really persuasive, sold you policy and you have obliged to your agent uncle. But damn, in fact agent has not sold to you but you have really bought it. It is, now up to you and your onerous is what you are buying.

Financial Mis-Behavior

The other majority of the problems in our financial life are purely because of psychological reasons. Behavioral Finance is the area of finance that combines psychology and finance together and gives you an insight so as to how a common investor makes mistakes in his decisions.

You used to go the Sabzi Market and buy a kg of tomatoes at Rs 40 and each tomato you select with such a care thinking that you have to buy a quality product that consume yourself and not on the recommendation of the seller. On the flip side, you do not understand much about investments and insurance, but still you keep buying absurd financial products worth Rs 10,000, Rs 50,000 or Rs 1 lakh even without blinking an eye. While looking both scenarios, you will notice that you are the same person as you are not giving botheration at all when you are investing in Mutual Fund or Insurance. Truly speaking, when I thought about it, I reached a conclusion that it is true that we do not think when investing in Mutual Fund, but we think a lot when we are buying tomatoes, because we understand tomatoes. But, we don’t understand Mutual Fund at all. So we devote our time on things which we understand.

No Financial Literacy

You can be highly educated, savvy and professionally successful but you may be financially illiterate and thereby end up making gross mistakes. You, often work harder than you need to because you learned how to work hard, but not how to have your financial products work for you. If people are having difficulties financially, there is something that they cannot read, either in numbers or words. Something is misunderstood. The rich are rich because they are more literate in different areas than people who struggle financially. So if you want to be rich and maintain your wealth, it’s important to be financially literate, in words as well as numbers. However, it is not even widely known that financial literacy is not just about financial products but psychology. Research has shown that human beings are simply hardwired not to understand financial products even relatively simple product like mutual funds, bonds etc. When dealing with money, savers do irrational things and are subjected to other kinds of biases as well. Warren Buffet, the world’s most successful investor says “Investment must be rational; if you can’t understand it, don’t do it. “ But almost everybody, like Mr Singhania as allude in example, forgets this basic rule and got fall in trap of bad financial products.

“Want to build your wealth to achieve your life goals, first, build your knowledge”

Way to go

Whilst selecting right Financial products could be boring and scary, even given how they inflict losses due to low financial awareness among the mass of people. Stock brokers, agents, distributors, mutual funds, insurance companies all keep offering more and more products in different flavors through thousands of confusing choices. They are doing their own jobs, having targets to meet and salaries to pay. We rely mostly on “free” advices most of the time and while taking the advantages, agents are selling you to their idiotic products like, ULIPs, NFOs, endowments polices etc. But you have to be vigilant from these free advices that are eating your hard-earned money through their hefty commission.

By reducing your choices to the right ones you need, we at PrudentFP support you with unbiased information and continuous handholding. We make you understand reasoning behind every suggestion gives to you. We make sure that you agree and understand everything, so that in future you can take similar decisions yourself. Has any Mutual funds advisor told you why SIP is better for you Or Why You should expect great returns in long term from Equity? To get the answer, post your comments and queries in below comment section.

 Image Courtesy: FreeDigitalPhotos.net

PS: This article got published in Hindi Dainik Bhaskar on 23-08-2016

 

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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