How many times did you buy an insurance policy because its name contained the word child, children or kids?
Those who sell financial products (like mutual fund schemes, insurance policies or stocks) know exactly how to play with your emotions and make you buy a product without understanding their pros and cons.
Here are some examples of how sellers play on basic human emotions like greed, fear, anxiety and hope to manipulate buyers.
Stockbrokers
Brokers make money only when you transact.
Their returns are not linked to whether you make money or not; it depends on the number of times you buy and/ or sell stocks. To protect their own interest, brokers have created an image that more trading leads to more money.
This is why short-term trading has become so popular among common investors. Brokers play on the emotion of greed when they want you to buy stocks; they'll say the price of a particular stock is going to increase (the explanation: we got a call from our specialist, etc).
Suppose you buy a stock and it increases in value, they will recommend that you sell it because it is wise to book profits. Or they play the classic 'fear' card, saying if you do not book profit (sell the shares you bought at a lower price), the share price will come down and you will end up with a loss.
Similarly if you have bought a stock and it reduces in value, they make you sell it for that reduced value. The explanation? You should cut your loss as the share price could go down further as a result of which you could lose even more money.
As skilled players of this game, they know how to focus on your emotions of greed (to buy) and fear (to sell) to make you do more transactions. The more you buy and/ or sell, the more money they make as their brokerage fees.
ULIP insurance
If you are considering a ULIP, you will find enough people trying to make money off you there as well. To understand this better, read 'Term insurance vs ULIPs: A reality check'.
Insurance agents will show you the past performance of ULIPs (equity-oriented) which have done exceedingly well due to the quick run up in the stock market over the past few years.
"The returns have been around 30 per cent annualised," they entice you. The insurance agents then mislead normal investors like you by projecting similar returns in the future, say over a 15-20-year horizon.
This despite the fact that the insurance regulator in India, the Insurance Regulatory and Development Authority, prohibits agents from showing returns of more than 10 per cent on any insurance scheme.
Also, agents sell most ULIPs saying that an investor needs to pay only three installments (for three years). The information that almost 80 per cent of the charges, like mortality and administrative costs borne by the company to service your policy, are recovered from you in the first three years is conveniently left out.
To understand this better read 'Why ULIP is not the best insurance product'.
3. Emotional selling
Many people think of investing for their future when they have their first child. Many of them buy children's insurance policies (most of them have higher costs than the regular policies available for investment) that earn the seller a high commission.
This is an emotional sale; you are convinced to make the decision to secure your child's future. Most parents do not delve deeper and understand the costs involved in such products. They are in an emotionally charged state and feel they are making the best decision for their child by buying the policy.
Actually, the traditional (non-ULIP) child policies are only able to deliver a return slightly better than inflation (probably 7-8 per cent annualised in today's terms). The investment horizon for a child insurance policy is generally more than 12 to 15 years.
The best investment, which has maximum return potential, for such a tenure is equity (preferably through mutual funds and the SIP route).
4. Selling mutual funds
~ New Fund Offers
Mutual fund advisors are able to sell NFOs easily because of a lack of awareness among investors. They sell it saying the mutual fund is offering units at Rs 10. They point out that existing fund units are more expensive (their NAVs are higher than Rs 10), hence you will receive lesser units.
In reality, new funds are no better than existing funds. In fact, there are higher charges associated with new funds. The reason mutual fund advisors push NFOs is that they are offered higher commission here.
For existing equity-oriented funds, if the commission is around 2 per cent, in NFOs it goes as high as 4 per cent plus incentives (which may also be a foreign trip) on meeting certain target collections.
These higher commissions, interestingly, are recovered from the investor as entry and exit loads and other administrative charges. In most cases, an existing fund would be better as its past track record enables you to evaluate how it has performed.
~ Dividend
This is the amount mutual funds distribute to their unit holders as per a given mutual fund scheme. This payout could be monthly or annually, depending on the option you choose.
Mutual fund distributors sell a lot of dividend schemes by stressing that it will give them dividends at regular intervals. More often that not, naive investors fall for the lure of getting dividends and subscribe to the scheme.
Most people feel that dividend is like magic. You are attracted by the words 'tax-free' that your mutual fund advisor uses. They forget that the mutual fund company pays something called as dividend distribution tax (In equity-oriented mutual funds this tax is nil; this tax is applicable only on debt-based mutual funds) before the money is handed to you. In effect, the tax is paid from your own money.
In practice, there was a concept called dividend stripping (which many of us may not be aware of) that made dividend paying mutual funds a great option.
But, now, the laws in this matter have become very complicated. Hence, dividend is no longer an attractive option.
Besides, equity mutual funds are supposed to be investments for the long term (say five years or more). And any gains that happen after one year is anyway tax-free (as per current laws).
Hence, the whole concept of pushing mutual fund schemes that periodically declare dividend is questionable. Dividend is more of a marketing trick to increase sales.
The author is a Pune-based specialist in financial planning. He can be reached at vetapalems@rediffmail.com.
Disclaimer: The intention of the article is only to make people more aware of the practices followed in selling of products. It does not comment on which product is good or bad. All products are there to meet a specific objective. Satisfying your need or meeting your objective should be the basis on which a product is supposed to be selected.
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