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Instances of misleading claims by unscrupulous agents, and why you should call their bluff.
Mutual funds
Claim: A new fund offer(NFO) with ₹10 net asset value (NAV) is cheap
Fact : Not quite. NAV is the market value of the mutual fund scheme’s portfolio divided by the number of units. It is a reflection of the fund’s performance. An existing fund with a high NAV could likely have a high portfolio value. An NFO starts with an NAV of ₹10 for the sake of convenience; it does not mean that the fund is cheap. What matters for an investor is the increase in the NAV over time in an existing portfolio as well as in an NFO. The NAV at the starting point is not relevant.
Claim: You will miss out by not investing in this new fund offer (NFO).
Fact : Not really. NFOs do not have a performance track record to go by; existing schemes do. NFOs make sense only when the investing theme is unique but most NFOs do not have anything new to offer. They also often have higher expense ratios than existing funds. Also, many NFOs are close-ended, which subjects them to lock-ins and liquidity constraints. Agents earn attractive commissions on NFOs.
Claim: Dividend schemes of equity-oriented balanced funds give regular monthly income
Fact : There is no obligation on balanced funds to give out regular dividends. Funds can declare dividends out of realised gains. If the market becomes volatile and the fund’s NAV dips, it may not have the surplus to declare dividend. Also, with the recent Budget taxing dividend from equity-oriented funds at 10 per cent (dividend distribution tax), the regular dividends seen over the past few years may ebb.
Insurance
Claim: You can double your money in insurance plans
Fact : Money doubling over the long term is not a big deal, nor does it mean that the investment is a high-return one. The internal rate of return (IRR) in traditional endowment policies is just about 4-5 per cent. Going by the rule of 72, this means that the money doubles in 14-18 years. ULIPs are market-linked products whose fortunes swing with the market movements; there is no guarantee of returns.
Claim: Bonus is 70-80 per cent of the premium amount
Fact : The bonus benefit is being projected based on one-year premium. But you will be paying premiums for the entire policy tenure, and the bonus will be given at the end of the tenure. On balance, the IRR on traditional plans is just about 4-5 per cent.
Claim : ULIP is a five-year product
Fact : It is just that ULIPs have a lock-in period of five years. But to benefit from ULIPs, you need to stay invested for a much longer time. Especially because much of the costs in ULIPs are incurred in the initial five years.
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