News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

This article was first published 7 years ago
Rediff.com  » Getahead » 10 questions to ask BEFORE you invest

10 questions to ask BEFORE you invest

By P V Subramanyam
July 13, 2016 08:59 IST
Get Rediff News in your Inbox:

Ignore these and you will end holding duds...

It is common to see people with some reasonable income to be chased by relationship managers to buy some product or the other. Most of them have no clue to understand what is being pushed at them, so they say YES!

Here is a checklist of important questions that you should ask before you invest:

1. Do I need that product?

Most of us do not need the seventh mutual fund scheme or the unit linked policy, the pension plan, the new micro cap fund which invests in Tanzania and Taiwan -- we just do not need that product. So if you do not need that product, why break your head over it? Just ignore.

2. Do I understand the product?

Every product should be easy to break up into expected returns (depending on the underlying assets), managing fees. If the person who comes to sell the product is not able to explain it in such a simple language, be wary.

For example mutual funds are today governed strictly by SEBI. So it makes sense to come out with 'Capro', 'PMS' etc. which can charge you a higher fee than a regular product. The more complicated a product, the more expensive it is.

3. How much does it cost?

Can I decipher the product and find out the cost? An index fund costs about 1 per cent in total costs -- every product should revolve around this number. The higher the number, the greater the risk. Look for listing all costs -- one time, regular, and 'ending' costs. If it is complicated, ask question 1 and 2 again.

4. Does it fit into my over all plan?

In my overall plan all I needed was a savings bank account, term insurance, index and other funds, -- does this product fit in? Do I have to buy this to force myself to please somebody or some such nonsense? If it does not fit into your plan -- increasing the list of products that you have is not appreciated.

5. Is this really a long term product?

A 3 month put or call option is not a product that an investor needs. So if it is a short term product and you are not too keen to look at it, smart you. Now move on. You are not a trader so you do not need a capital protection product which will protect your capital over four years. You are a long term investor who understands volatility, standard deviation, and equity returns.

Also if it matches your requirement profile -- say your son's higher education is 15 years away, clearly you can take an equity bet instead of going for these kinds of expensive 'guaranteed' products.

6. What is the track record?

Of the supposed fund manager, the fund house, that is bringing it to you and the person who is bringing it to you. All of that matters. I have no respect for some corrupt fund managers -- and I refuse to look at products from those fund houses. Never mind that the fund manager has left -- I am still worried about the quality of the fund managers. It scares me. So look at all these and if you are even a little uncomfortable, just say NO.

7. What is the possible downside?

If I wish to come out of this transaction whenever I wish, what is the haircut that I have to take? Is it 100 per cent, 90 per cent or 10 per cent? What is the tax implication of entry and exit? Look at NPS (National Pension Scheme), for example. I hate the fact that it is a long term investment with tax at withdrawal, AND NO INDEXATION; it is a criminal product, terribly structured. I do not have an NPS account just for this amazingly stupid structure.

8. What is the lock-in?

A lock-in does not bother me at all. However when I am investing I need to know that I cannot exit it for the next 3, 5 or 15 years, that is all.

9. How easily can you get out of it?

Ever tried surrendering a life insurance endowment plan? One company with whom I used to deal with earlier has made it almost impossible to take one's money out. So one question to ask the 'operations' staff (not the sales guys) what is the process of surrendering the product. The sales guy is prone to faking it. Be careful.

10. Finally, who are you buying for?

Am I buying this to please my boss, doctor, wife, neighbour, veterinarian, dentist, dog walker, daughter's classmate's father, etc. If the answer to these questions is yes, just junk it.

Illustration: Uttam Ghosh/Rediff.com

Get Rediff News in your Inbox:
P V Subramanyam