Simple rules to know before buying a financial product

Investment

oi-Shoaib MD

By Shoaib Md

Published: Friday, July 1, 2011, 17:16 [IST]

All of us are careful before we buy any grocery for the house. But are we really careful when it comes to investment? Or even while buying a financial product?

Some of the common excuses are, they are all so complicated; it is boring; I have no interest in it etc. One of the bizarre explanation is 'I don't have time', even though the money belongs to the same individual.

So to help you sort through the financial world and arrive at the right product, here are a few questions to be answered to get the right product.

What is the purpose of buying this product?
This is where most of us make the first mistake. Because, if the purpose is to buy an insurance, then there is no point in looking at the rates of FD. If it is to save tax, then we must look at the products which will provide us with deduction from the income-tax department.

What is the effective return?
Effective return and total return are not the same. Consider the following examples.

Suppose if you buy a share of a company today for Rs 100 and then sell it tomorrow at Rs 120. Now, if anyone asked what was the return, the answer would be 20% [(120-20)/100x100]. But there is no brokerage cost involved and even the short-term gain tax is taken into account which will bring down the return, therefore effective return. Post brokerage charge and taxes will be somewhere around 15%.

The same would be the case for the fixed deposits (FD). These days most of the banks offer nearly 8% rate of return for a one-year deposit, but based on our tax bracket, the effective return will fall down to 6.5% to 5.3% post-tax.

Similarly for hybrid products also we need to separate the costs and calculate the effective returns. For example, unit-linked-insurance-plan (ULIP) is a hybrid product which offers insurance and investment. So when buying this, it would be prudent to sit and calculate if it benefits us more or will we get more returns if we buy a separate insurance plan and make investments in a mutual fund.

What is the liquidity level of the product?
Liquidity is an investment term. It simply means how easy is it for you to withdraw your money without losing value.

Taking the money out of a fixed deposit is easy but selling a property can't be done fast. This makes fixed-deposit a highly liquid investment but investing in property a low liquidity investment.

It is imperative that, when considering any type of product, our choice should depend upon the investment goals.

How easy is the transaction?
Today, when time is the most valuable asset, it is important to see if we can purchase a product in least amount of time. The good news is that, most companies provide an online route to purchase their products, thereby saving time.

ICICIDirect.com, HDFCSecurities.com and Sharekhan.com let you buy equities, funds and bonds online.

Dedicated portals like FundsIndia.com and Fundsupermart.co.in allow you to invest in MFs at the click of a button.

Even net banking allows you to buy FDs and request for loans from the comfort of your home.

Meanwhile, insurance portals like Policybazaar.com and Click2insure.com allow you to compare and buy policies across insurers.

Agents and financial planners: The only place where no online product offered is the post office. But there are agents or brokers who can help with investments in post office. Also many financial planners provide assistance to buy investments and insurance policies, saving you all the paper work.

Now that we have answered all the important questions; it's just a matter of simple application that helps you choose from among the best products of your liking.

OneIndia Money

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