What To Ask Your Investment Banker

By | August 25, 2019

Your investment banker gives you the best investment options but you need to be proactive and ask him some questions before choosing your investments. Here’s help.

What To Ask Your Investment Banker

He is suave. He knows everything about the market. In fact, he knows everything about any financial product under the sun. Just a few signatures and you are done buying the financial product that your investment banker recommends. All in the comfort of your home. Sounds cool?

Actually, even though it is convenient to have a financial advisor, asking a few questions of your own, isn’t a bad idea. Your advisor might be time-deprived. He might miss some information or he might assume you already know about it. It is your responsibility to ask him everything about a financial product before you sign on the dotted line. You should know the right things before buying any product that will affect your financial standing. Here are 10 things that you should be asking your investment banker.

Mutual Funds

Number 1

What he says to you: Fund AAA is better than Fund BBB.

Question on your mind: Can these funds be compared?

What you should do: Ask if it is okay to compare the two funds. There are different types of Mutual Funds. These include diversified Equity Funds, Sector Funds, Mid Cap Funds, Small Cap Funds. When choosing a fund, one should always compare funds that are in the same category. For instance, a Small Cap Fund should be compared with another Small Cap Fund. Why shouldn’t it be compared to say, a Large Cap Fund? Here’s why – Small Cap Funds invest in small-cap stocks and Large Cap Funds in large-cap stocks. The former is more risky and volatile than the latter. So, their returns will also differ accordingly.

The same is true for Debt Mutual Funds. That is the reason why you must compare funds from the same category to assess whether a particular fund has been doing well. Some websites also provide you with a category average that you could use for comparison. Ask your banker to compare the fund you have chosen with at least 2 or 3 peers to ensure that the fund has indeed performed well.

Number 2

What he says to you: Equity Mutual Fund XXX has given good returns in the last one year.

Question on your mind: What about the 3-year and 5-year returns for this fund? Have they been good too?

What you should do: When choosing Equity Mutual Funds, you must take into account the long-term performance of the fund. Even though past performance is not an indication of future performance, a fund that hasn’t performed well in the past has little chances of doing well in the future. This is where comparisons help. Even if you want to consider the fund because of its one-year performance, compare it with the one-year returns of similar funds. If all of them have done well and this has underperformed, you will have your answer. Remember that one year is too short a time to judge Equity Mutual Funds. Equities are meant for the long-term and tend to do well if you remain invested for 3 years or more.

Number 3

What he says to you: You can invest in many funds.

Question on your mind: How many is too many? When should I stop?

What you should do: When you invest in too many funds there are three disadvantages. One is that you will not be able to handle multiple funds in your portfolio (the buying, selling and checking progress becomes complicated). Two is that your Mutual Fund portfolio could become over diversified or concentrated. If you invest in the same type of funds you will have a concentrated portfolio and if you invest in diverse funds, you will have an over-diversified portfolio (minimising returns). Number three and the most important one, too much of your money could be invested in Mutual Funds. Your portfolio needs to have all the asset classes.

Typically, experts recommend that you invest in no more than 5 funds, especially if you have no knowledge about Mutual Funds. If you decide to invest in more funds, get help from your investment banker to take a call on buying and selling them.

 Additional Reading: Understanding Mutual Funds


Number 4

What he says to you: Floating-rate interest rates change along with interest rates in the country.

Question on your mind: Does this happen automatically? Do I need to request a change when interest rates change?

What you should do: Banks may sometimes miss telling you that your loan rates (for a floating-rate loan) don’t change automatically. This is only true when interest rates are falling. Banks usually make changes to your loan rates automatically when interest rates rise. When interest rates fall, you might need to request your bank to change your loan rate. Some banks may even charge a downward revision fee for changing your interest rate. This is usually a one-time fee. So, ask before you choose a floating-rate loan.

Watch This Video: Fixed Vs. Floating Rate of Interest

Number 5

What he says to you: You can foreclose your loan.

Question on your mind: Are there any charges for foreclosure? Do I need to wait for some time before I can foreclose?

What you should do: Most banks do allow you to foreclose your loan – be it a Home Loan, Car Loan or Personal Loan.

However, there is a waiting period. You cannot foreclose your loan before this period. Also, there might be charges involved. In fact, there are banks that charge as much as 5% of the principal outstanding for foreclosure, which might turn out to be expensive for you. For example, for an Rs. 3 lakh outstanding balance, this comes to Rs. 15,000. Be sure to learn about the charges before taking a loan. Also, weight the pros and cons of foreclosure, especially for a Home Loan, since it gives you tax benefits.

Number 6

What he says to you: We can add your Home Insurance to your Home Loan.

Question on your mind: Will this be made automatically? Can I opt to pay for it separately?

What you should do: It is routine work for banks to bundle insurance along with Home Loans. The Insurance amount is often added to the Home Loan amount. This means that you pay interest on the insurance premium! It is best for you to take the Home Insurance separately.


Number 7

What he says to you: A ULIP is better than any other insurance.

Question on your mind: How is it better? Is it suitable for me?

What you should do: ULIPs do give the benefit of insurance cover as well as returns. But they are not suitable for everyone. ULIPs are best suited for the young earner who has many years to reap returns and also needs life cover because their income is important to their family. Ask your banker to do a need analysis to find out whether you need a ULIP at all. A Term Plan will be cheaper if protection is the only thing you are looking at. But if you are looking for an investment cum insurance cover, ULIP is your best bet.

Number 8

What he says to you: Here is the illustration showing you the returns you will get from this ULIP.

Question on your mind: Is this illustration provided by the insurance firm? What are the assumptions made to arrive at the return?

What you should do: Most insurance companies provide illustrations for their ULIPs which show you indicative returns. However, some investment advisors may choose to make their own, using an excel sheet. In this case, ask for a company-given illustration. Compare to see whether the figures are disparate. If you are willing to look at the calculations made by your banker, ask for the assumptions he has made to ensure that the assumptions are reasonable for the returns projected.

Additional Reading: ULIP – Should You Consider Investing Or Not?

Credit Card

Number 9

What he says to you: You can receive cashback on spends.

Question on your mind: Is there a limit to the amount of cashback? Are certain transactions not given cashback? Which are those?

What you should do: Typically Cashback Credit Cards have a theme. One might provide you cashback on shopping, another on your flight tickets and another on movie tickets. There are very few Credit Cards that provide cashback on all spends. Most provide reward points for all spends. If the Credit Card does provide cashback for all spends, check if there are any limits. For instance, there are cards where you can receive cashback for only spends of Rs. 10,000 per month. Ask for the terms and conditions.

Number 10

What he says to you: You get joining reward points as soon as you get the card.

Question on your mind: Is there any minimum spend I need to make before I get those reward points? When will they be credited?

What you should do: Most Credit Card issuers set terms and conditions for giving you free reward points. For instance, some card issuers state that you need to swipe your card within 30 days to get 50% of the bonus points and the rest will be given if you swipe at least Rs. 2,000 within 60 days of getting the card. The points will expire if you don’t swipe the card within the set time limit. Check these before you choose a card.

If you want to avoid all this, go to a neutral financial website where you can compare all products across lenders and gather information about the charges upfront.

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