How To Avoid Falling Into The Trap Of Misselling Of Mutual Funds By Banks
The lure of higher returns might make the investment opportunity exciting but it is important to save yourself from misselling.
There are multiple times when you would have your bank relationship manager call and inform you about an exciting investment opportunity that should not be missed. These often involve mutual funds that are sold by the banks to their customers. The lure of higher returns and promises might make the investment opportunity exciting but it is important to save yourself from misselling so that you get the appropriate investment for your needs. Here are some ways to ensure that you are making the correct decision.
Does It Meet Your Goals?
An investment in your portfolio has to be in line with your goals. An addition to the portfolio should be done only when it has a specific role to play in achieving a target. If there is a mutual fund being sold to you just on the basis of past returns or on the basis of it being in a position to give high returns then this is not the right reason to invest.
Are You Doing The Right Comparison?
Investment decisions and returns are often framed as a comparison between two instruments. Banks which traditionally sell fixed deposits often frame other investment opportunities in comparison to fixed deposits. This comparison would be appropriate only if two debt investments are being considered. In case of mutual funds it is usually equity oriented funds that are being pushed to customers by the banks and if these are compared to fixed deposits then they are not the right thing to do as they belong to different asset classes. Basing the investment decision on the correct comparison will also help you to avoid making the wrong decisions.
What Choices Are You Presented With?
One of the main things when making an investment decision is to have a choice. If the bank official is not giving you a choice then this is not the right way to sell a mutual fund. There would be specific requirements of the individual and due to this there is a need to consider the various options that are present and only then can a selection be made. If the bank is offering you schemes of only one single fund house which is actually the bank’s related entity then even if the fund house is a good one with excellent performance, it is a red flag. Choices also provide an opportunity to diversify across fund houses which is essential for the investors portfolio.
Are You Being Lured With Past Returns?
Often there is a mention of the past returns of a mutual fund and then it is projected that the fund will give a certain amount of returns. The returns of a fund will vary significantly depending on the kind of market situation that is currently prevailing. Several categories of equity funds are also very volatile and hence there are big changes in the returns over a period of time. Any investment decision should never be based only on past returns because there is no guarantee that these returns will continue in the future.
Is The Scheme An Underperformer?
Every investor should look at a mutual fund scheme and its comparison to its benchmark as the first step. The next one involves looking at the peer performance and once this is done the complete performance picture will emerge. This analysis has to be done over a longer time period and an attempt to sell schemes that are underperforming consistently will bring out the attempt at misselling. This exercise will require some homework from the investor but this is essential if one has to avoid falling into the misselling trap.
Arnav Pandya is founder of Moneyeduschool.