Stay smart

It is high time product regulators such as the RBI, SEBI and IRDA cracked the whip and plugged the loopholes. They should specify the when and how of calculating and advertising returns, yields and costs, ensure that product providers and agents toe the line and withdraw misleading claims.

Until then, it is ‘buyer beware’. Here are a few ways you can be on guard.

Knowledge is your best defence. Learn the basics of finance from the many resources available online, such as Investopedia. In particular, understand key concepts such as time value of money, compound interest, CAGR and IRR before you make financial decisions.

Know simple stuff such as the Rule of 72 — a quick way to estimate the number of years in which your money will double at a given rate of return; just divide 72 by the annual rate to arrive at the approximate number of years. For instance, at 8 per cent annually, your investment should double in about 9 years (72/8). Likewise, if your money doubles in nine years, the effective annual rate is about 8 per cent. This will help you not get carried away by advertisements claiming ‘doubling of money’.

Don’t take claims at face value. Check if the number is right with online calculators or the financial functions such as Rate, IRR, XIRR, PMT, PV, FV in Microsoft Excel.

Read the fine print; don’t be afraid to ask and have your doubts clarified. Understand various costs in loans, method of calculations and effective costs. While evaluating investments, focus on post-tax returns because that is what you eventually get in hand. Avoid complex products you do not understand despite reasonable effort.

The old chestnut always holds — if the offer is too good to be true, it probably is. In short, be smart with your money and on top of the number game.


The number game: Buyer beware

How agents mis-sell products

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