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Beware! That flashy ad could be an investment trap

Last updated on: June 23, 2010 10:46 IST

Glossy advertisement, billboards, pamphlets or other form of advertisement attracts one and all. Especially if it is accompanied with a freebie. Who would not like a free gift or an extra something?

But do remember that nothing comes free in this materialistic world. The same is true of investments. How many times have I seen novices as well as well-informed investors being lured in by big returns or the promise of guaranteed returns?

Do not be misled by glossy investment advertisement. This article is aimed at making you focus on the asterisk at the bottom and not on the beautiful lady on the billboard.

Read on for some of the flashy strategies that lure investors, sometimes, into a trap.

The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com

Guaranteed returns

Last updated on: June 23, 2010 10:46 IST

A wise man once said: the only thing guaranteed in life is death and taxes.

Let us take the example of the numerous unit linked insurance plans which offer guaranteed returns or guaranteed returns based on highest NAV (net asset value) during the policy term.

Like I said nothing comes free.

In return for buying this plan wherein the highest NAV is locked during the tenure of the term which is paid on maturity, a higher fee is charged. Please compare the fees charged on highest NAV plan with other simple mutual fund products to know the difference.

In the first place, the fees charged by ULIPs are already high. Fees charged by ULIPs based on guaranteed returns are even higher.

Moreover, the investment strategy applied by such ULIPs is different. Due to the pressure of guaranteed returns they mainly invest in debt products whereby you get a guaranteed return but the return is nevertheless limited.

The same applies to investments made in company fixed deposits. Higher the rate of interest more cautious the investor should be.

As high returns means high risk and an investor opting for fixed deposit is looking for fixed returns minus the risks.

Guaranteed return with minimum risk should always be approached cautiously.

Technical jargons

Last updated on: June 23, 2010 10:46 IST

Flashy pie charts, tables, bar charts are sometimes useful, look good, but again they can be misleading. Glossy pamphlets or advertisement mean nothing.

It is just another flashy way to lure gullible investors.

An investor has to look for subtle hints. If equity returns are compared with debt returns, the comparison is unfair. Why on earth are you comparing apples and oranges?

Investments in equities definitely give more returns than debt over a longer period of more than 8 years but are accompanied with high risks and volatility.

Returns comparison

The best example would be mutual funds.

Many times mutual funds are sold by showing you past returns. But what is not clear is the period for which these returns were made.

The period used to calculate such returns may be as recent as three months old -- the period when equities could have performed well.

This paints a rosy picture of the returns and lures an investor to invest in the fund.

Similarly, past performance should not be the sole basis of investments. Past performance does not guarantee future performance.

Complex products

Sometimes investors get attracted towards complex products as they feel it will generate good returns for them just because the product is complex!

Complex or structured products are marketed in a simple but big way. The best investment strategy to follow when faced with such products is to stay away from what you do not understand.

False advertisement claims

Last updated on: June 23, 2010 10:46 IST

Back end services offered to you by your investment company should be a very important factor for investing in any financial product. Again products solely sold on the premise of back-end services also need to be scrutinised carefully.

I have heard many complaints like "the agent who sold me this product has now changed jobs or is not available". Be wary of brokers or agents who say they predicted the boom or the bear markets, or their recommended stock has performed well and everyone who invested made good profits.

Research well before you finalise on any broker or an agent or any product.

At times investor put money in a fund or stock just because it is advertised in a big way. Or there is an announcement of the company declaring a huge dividend. Later, this decision is regretted.

Dividends lure many investors but again it is no guarantee that in the future they will be able to pay the same. Hence research the product well before just blindly investing for dividends announced.

Free seminars and conferences

Many brokers, banks, organise free workshops and seminars wherein additional incentives and free gifts are given. Be cautious as you may end up investing in a product you didn't want to.

There are regulatory bodies that provide guidelines and assistance to common investors.

Remember that an advertisement should be viewed as an awareness tool rather than an invitation.