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Speculate, but learn how the markets work

Our parents and the generation before them used to generally deploy all their savings in bank fixed deposits, National Saving Certificates, post office deposits, RBI Bonds and so on. Read on...

india Updated: Aug 12, 2008 21:18 IST

Our parents and the generation before them used to generally deploy all their savings in bank fixed deposits, National Saving Certificates, post office deposits, RBI Bonds and so on. These fixed return generating instruments used to meet perfectly well their capital protection and growth objectives.

Unfortunately, in today’s globalised world, the above referred fixed coupon instruments yield on an average around only 8 per cent and being taxable, end up providing a net return of around 5.5 per cent. This in a scenario where average inflation is around 7-8 per cent, results in a negative net income and depletion of corpus in the true sense of the term.

Thus arises the current desperate need for financial literacy and financial planning among mass retail investors. In order to protect capital, today investors need to necessarily deploy at least a part of the savings in risk financial instruments. To understand and appreciate these instruments prior to such deployment, we need financial literacy and correct advice.

In this context, the role of the intermediary, financial planner or advisor gains significant importance. It is expected from them that correct knowledge would be imparted and appropriate product would be sold. Unfortunately the financial landscape is littered with tales of mis-selling.

To protect themselves from such mishaps, an investor should look for an unbiased and trustworthy intermediary. He should ideally look for not a product seller but a financial planner who would be more like a doctor and not a pharmaceutical salesman. The basic questions an investor should ask an intermediary should include the following:

1. What is the commission he would be getting out of the sale?

2. What are the competing products in the same space and how the product suggested is superior.

3. Are there any similar products in some other domain which may lead to fulfilment of similar financial objectives at
a lower cost? (Unit linked insurance plans versus mutual funds, for instance.)

4. Does the intermediary sell all the competing products or only few specific products?

5. Who will provide the after sales service. That is, will the intermediary remain engaged even after selling the product?

6. Would the intermediary facilitate timely renewals (if appropriate) on a regular basis?
The principle of “Caveat Emptor” that is “Buyer beware” also applies to a financial service buyer and abundant caution should be exercised while selecting the intermediary through whom the product or service is being acquired.

(Sudip Bandyopadhyay, Director and CEO, Reliance Money)