Understand your agent’s financial services!

By BankBazaar | August 14, 2011

Most of the time, we heed to the advice of the experts thinking their decision is the ultimate. Any deviations from such solutions to our financial queries can cause upheaval in our financial management. But this perspective is very wrong.

There is no harm in questioning your agents’ financial decisions; after all it is your money that is at stake. You, as a prudent investor have all the right to know where, in what and how much of your funds are being invested and what are the pros and cons of the fund in which you have been invested. Blindly following increases the risk of losing out on your investments which in turn can lead to borrowing of debts like personal loan, home loan etc in the future so as to meet your financial requirements. This is definitely not what you have foreseen and is best avoided.

Financial advisors and agents, due to low churning of investors’ portfolio, tend to pursue only that path where they are on the gaining side and the investors on the other end. Sunil Sharma approached a financial agent with the aim of saving Rs 2 lakh into an equity fund. The agent tells him not to invest the entire amount as it could lead to loses if the markets end up in a crash. Instead, the agent advices Sunil, to invest Rs 2lakh in a liquid fund and on standing instruction, after 8 months, a part of the amount say Rs 24,ooo be transferred to the desired equity fund. This means, Sunil invests in an equity fund and transfers it using STP, to another equity fund, enabling the agent to churn out commissions on both the transactions. Apart from this loss, if Sunil makes any capital gains, it would also be taxed away.

Systematic Investment Plan is the route which investors should opt for as it helps greatly in reducing the risk of the funds that are invested. As you know the saying, Do not put all your eggs in one basket”, it is not safe to invest all your funds in one equity fund in just one go. If you want to invest it in lump sum, park those funds in a low risk debt fund, and then opt for STP into your desired equity fund every month.

Systematic Transfer Plan is just the opposite of the working of Systematic Investment Plan. Under STP, the funds of the investor, after a particular period of time, will be transferred from an equity fund to a debt fund so that the investor is safe guarded from the bearish phases of the market when the period of the fund maturity nears. Thereby, securing his gains from volatile market conditions.

In another situation, an investor instructed the bank in which he held his bank account that his funds be put in a liquid fund and then do an STP to another fund that was an equity- heavy balance fund. To his shock, after a year he notices that the bank has just done the opposite! All his funds were saved in the equity fund and then STP was opted to transfer funds to the liquid fund.

The entire meaning of safeguarding the investor is lost. In the above scenario, the investor has to bear the risk of a sudden equity investment. In addition to this whatever returns he made were taxed away due to the payment of the capital gains tax and then later, his money was parked in a low return generating fund for a long term.

You should not be in the above mentioned situations. Make sure you understand all the technicalities that your fund requires so that you get a better understanding when you have your money invested in them.

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