Silence is golden,” goes the famous adage. But when it comes to your important financial decisions, in areas ranging from loans, insurance and mutual funds to real estate and online broking services, it could prove fatal. And, unfortunately, we often miss asking questions that are vital to our returns and expenses, among other things, and repent later.
This repentance—of either getting a raw deal, or not making the best use of your hard-earned money—could last for a few months or a lifetime, depending on the gravity of the mistake. What a shame that in most cases we don't ask those questions due to laziness, haste in decision-making
or inadequate interest in our own money! Obviously, the blame lies squarely with us.
Glossing over essential questions results in an insufficient understanding of the financial product concerned. Take, for instance, a health cover. If, while buying a policy, you assume that it will cover all sorts of expenses, you might have to pay a jaw-dropping hospital bill at a later date. That's because most health insurance plans only reimburse expenses for hospitalisation lasting more than 24 hours. And you are unlikely to have made provisions for that unforeseen expense because you thought you had it all
covered! A little alacrity and questions about the nature of the health plan would have shielded you from the damage.
Misunderstanding the nature of investment returns is another problem area. And, in most cases, probing the advisor as to whether the projected returns are 'expected' or 'assured' might save you a great deal of disappointment later. Legions of investors bought the growth version of unit-linked insurance plans (Ulips) and equity mutual funds assuming that astronomical returns were there for the taking. Not surprisingly, the actual returns failed to live up to their expectations.
Results of buying a financial product without doing enough homework on restrictive conditions manifest themselves in the form of penalties, especially in case of loan prepayments and lock-in periods. Many investors who jumped onto the Ulip bandwagon had no idea that their money was locked in for a good three years. (Currently, the lock-in is for five years.) Similarly, any decision to sign up for a service without knowing the apparent and not-so-apparent charges is almost sure to result in a rude shock.
With financial innovation constantly throwing up new propositions for consumers, it is impossible to avoid all future mishaps by simply asking questions. Yet, most would admit, especially those who have suffered, that by seeking answers to some key questions, you can always have greater control of your financial destiny.
We bring you important questions from different areas of your finances that you simply can’t afford not to ask.
So click on next page to start....
What part of my investment will go to you (the agent/distributor)?
THE HIT If you don’t ask this question, you might end up paying the agent fee for his advice even if you didn't seek or get it. Every time you invest in a scheme, a transaction charge is deducted from your investment. The charge is Rs100 per transaction for an amount of Rs10,000 and above for existing investors, and Rs150 for first-time investors. This transaction charge goes to the agent. The advisory fee is over and above the transaction charge and is negotiable.
COURSE OF ACTION Be alert. Pay the agent depending on the extent of services availed. If you are not seeking advice, you don't need to pay him the advisory fee.
Will there be any other deductions on the investment amount?
THE HIT Even though there are no entry loads on MF schemes now, fund houses charge you a recurring fund management charge for every scheme. It could go up to 2.25 per cent of the investment amount, depending on fund type and its size. It is adjusted on a daily basis from the fund’s NAV, depending on the size of the fund’s corpus.
Higher expenses for a fund mean lower returns. Let's take an example. Suppose there are two funds with expense ratios (total percentage of the fund amount used for expenses by the fund house) of 1.75 per cent and 2.25 percent. If you invest Rs50,000 in each of them for 15 years, the difference between the final proceeds is around Rs21,000, a significant amount.
COURSE OF ACTION Look for schemes with consistent performance and low expense ratios.
Can I withdraw my money in full whenever I want, without any penalty?
THE HIT Some MF schemes, such as equity-linked savings schemes (ELSS), have a lock-in period. In other cases, if you withdraw your money before the expiry of the stipulated period, you could be charged with an exit load. Thus, much depends on the kind of scheme you've invested in.
Besides, as mutual funds are market-linked, the value of your investment will keep fluctuating with changes in market conditions and the sentiment prevailing at that point in time. As a result, it may be well below the principal amount when you need the money.
COURSE OF ACTION Get a fix on your goals and investment horizons, and choose schemes accordingly.
Click on Next page for questions on Life Insurance
On what basis do you claim guaranteed returns?
THE HIT In net asset value (NAV)-based policies, agents typically promise high returns. The usual spiel is that the payout will be based on the highest unit value achieved during the policy term. What the agents don’t tell you, however, is that equity allocation is usually very low in these plans, which caps the NAV's movement. Similarly, in many traditional plans, guaranteed returns are announced at the beginning of the tenure. But high returns in the first year do not mean that the company will keep paying you the same throughout the policy term.
COURSE OF ACTION Check policy documents and company websites as to whether the returns are really guaranteed. Don't go by the agent's word blindly.
How long do I have to keep paying the premium?
THE HIT An agent may sell you a regular premium paying plans as a single premium plan, i.e., where you need to pay the premium for only one year. In such a case, your liquidity position might suffer in future. With most plans having a lock-in period and steep surrender penalties till a certain number of years, exit isn't going to be painless.
COURSE OF ACTION If you don't want to be tied down by a financial commitment such as an insurance plan with regular premiums, you can look at policies with the limited premium payment option. Here, you will have to pay only for first five years.
As a matter of practice, while buying an insurance plan, check the premium paying term and how long you need to stay invested. Always cross-check your agent/banker's claims with what is mentioned in the proposal form.
Click on Next page for questions on Health Insurance
Does the plan have lifetime renewability?
THE HIT In old age, when the need for health insurance is greatest, ironically, securing one is very tough. General insurance companies usually deny health covers to senior citizens as the probability of ailments increases with age.
In the absence of a health cover in old age, you might have to dip into your retirement funds during an episode of major illness. This can not only derail your financial wagon in retirement, but also take away your peace of mind.
ACTION Always go for health policies with lifetime renewability. Many companies offer renewability till the age of 80 years, but we would advise you to go for one that states in its policy documents that it allows lifetime renewability.
Is there any outer limit or clause on the hospital expenses incurred?
THE HIT Even if the total hospital bill is well within your sum insured, you may still have to pay. That's because insurance companies have outer limits on most hospital 'expense heads', beyond which you will have to foot the bill. If the amount is substantial, you might even need to make a fire-sale of your investments, which could be earmarked for major long-term financial goals, such as retirement. This will be a serious setback in your journey towards your financial goals.
COURSE OF ACTION To rule out any nasty surprises at the moment of reckoning, ensure that you are clear about what is covered and what isn’t. For example, many policies have sub-limits on room rent and ambulance cost, among other things. This could result in partial reimbursement of the claim amount. Don’t go for policies with sub-limits.
To create additional cushion, create your own contingency fund worth 3-6 months of living expenses. Keep it in liquid investments so that you can meet any shortfall in the coverage of health plans.
Click on Next page for questions on Stockbroking Services
How quickly will my order be executed?
THE HIT If your broker doesn't act with alacrity, your chances of buying and selling at the desired price get impacted, affecting your final return. That's because if execution is slow, the share price would have moved out of the range you were looking at.
COURSE OF ACTION While choosing a stockbroker, inquire about its speed of execution. Says Rikesh Parikh, vice-president, markets strategy and product development – equities, Motilal Oswal Securities: “For those looking at short-term trading, execution speed is paramount. If the trading platform is slow, or has multiple layers of verification, your trading will get affected.” Clearly, speed is worth its weight in gold.
How does the brokerage structure work?
THE HIT If you are not aware of it, you are making yourself vulnerable to manipulation by the broker. He might offer you a plan with greater brokerage. If your trading volumes are high, you should go for plans that allow you to trade higher volumes for low brokerage.
COURSE OF ACTION Find out about the charges at the time of signing up for the service. Choose a plan based on your expected trading requirement and whether it's going to be predominantly delivery-based. Also, the brokerage would be different for you if you trade in futures and options. In certain cases, however, the brokerage might depend on your relationship with the broker and the volumes you trade.
Click on Next page for questions on Demat Accounts
Will I be charged for my demat account even if I don't trade frequently?
THE HIT Imagine not carrying out a single transaction throughout the year and still paying charges for owning a demat account. Quite a shocker, right?
COURSE OF ACTION While equity investing is highly desirable, it doesn't make sense to go for a demat account if you are not going to trade. That's because some firms charge an annual maintenance fee every year, regardless of whether you hold securities in your demat account or not. This charge is deducted directly from your balance.
The recently announced basic services demat account can come to your rescue in managing this charge.
Do I need to pay brokerage even if I make losses on transactions?
THE HIT Brokerage eats into your final return. Even if you make losses on your trade, you will have to pay the brokerage—clearly, a double whammy.
COURSE OF ACTION Be aware of all the costs and factor them into your calculations. If you must book a loss, account for the brokerage as well, which is a fixed outgo.
Can a volume trader customise the minimum balance and the brokerage?
THE HIT Ignorance about this facility will prevent you from reducing your costs and enhancing your returns.
COURSE OF ACTION While opening a demat account, inquire about the possibility of customising some of the charges. Says Parikh: “Volume traders can go for advance brokerage schemes or related offerings as a high turnover lowers charges.” Click on Next page for questions on Bank Fixed Deposits
BANK FIXED DEPOSITS
Is the bank offering a better rate for periods around the desired term?
THE HIT Banks typically offer their best interest rates for a specific number of days, such as 100, 300, 500 and 1,000 days, and not for standard periods, such as six months, nine months, one year, two years, three years and five years. For example, if you are looking to book an FD for a period of three years, the bank coukd be offering the best interest rate for a term of 1,100 days, which is quite close to your desired term. So, what you seek may not be the best on offer and, out there, it is unlikely that anyone will come to your help. There is no substitute to asking questions here. With lower returns on your fixed deposit, you will miss out on returns that were there for the taking. For example, on a five-year cumulative term deposit of Rs1 lakh, rates of 9 per cent and 9.5 per cent would result in a difference of Rs3,860.
COURSE OF ACTION Make a detailed inquiry about the interest rates offered for FDs of different tenures, and not just the most common and popular tenures.
Click on Next page for questions on Home Loans
What will be the basis of the valuation of the property (in the secondary market)?
THE HIT If you are banking on a home loan to buy a house on the secondary market, remember that the lender is unlikely to take your agreed price with the seller as the value of the property to decide the home loan amount. Lenders have evaluation teams that decide the value of the property. So, if you are willing to register the property for Rs75 lakh, but the lender evaluates its value as Rs60 lakh, you would not get more than Rs48 lakh as loan. As a result, you will have to arrange the rest of the amount yourself. Having this information at the very outset can help you decide whether you should go for the property or not, and if you can afford the acquisition.
COURSE OF ACTION Ask the bank whether the registration price would be the basis for the home loan or not. If not, you will have to brace yourself to pay a higher amount towards downpayment.
Click on Next page for questions on Real Estate
What is your (developer's) track record of completing projects on time?
THE HIT Your cost of acquisition will go up in case of delay in possession of your apartment or home. Worse, it might put pressure on your regular cash flows if you have to pay equated monthly instalments (EMIs) for the home loan in addition to the rent.
COURSE OF ACTION Contact some buyers and residents of the developer’s completed projects, and inquire about any delays in project completion, quality of construction, compliance with the agreement, amenities, after-sales service and routine maintenance work. Opt for those with an impeccable track record.
Are there any charges apart from the basic sale price?
THE HIT The basic purchase price is not the only thing that you have to account for. Typically, associated costs include hidden costs such as preferential location charges (PLC), interest free maintenance security (IFMS) deposit, external development charges/infrastructure development charges (EDC/IDC). Usually, these additional charges are in the range of 20-30 per cent of the basic price of the property. If unprepared, you might have to dip into investments earmarked for your other financial goals, such as your retirement and kids’ higher education. Not to mention, it also puts pressure on your regular cash flows.
COURSE OF ACTION While budgeting for a property purchase, apart from the basic purchase price, take into consideration all the other charges and fees that you need to pay for. Better still, have some funds in buffer to meet these costs.
What is the status of the completion certificate and the occupancy certificate?
THE HIT In the absence of relevant approvals and certificates, it is illegal to occupy an apartment and start residing in it. Moreover, in many cases, it would be difficult to get water, electricity and other utility connections. You may have also have to pay monetary fines to the municipal authorities concerned.
COURSE OF ACTION While buying a ready-to-move-in property, even before you hand over the earnest money or enter into a contract, find out if the developer possesses the occupancy certificate. This is a proof of completion of the building according to the approved plan and in conformity with the local laws.
Click on Next page for questions on Bonds
Can I sell my bonds in physical form before the maturity date?
THE HIT There is no market for bonds in physical form and you might find it difficult to get buyers. The transfer process is even more tedious. This might hit you hard when you are looking to organise cash for meeting an impending requirement. In extreme cases, it might mean a fire-sale of existing investments and even costly short-term loans.
COURSE OF ACTION It is best to convert your bonds in physical form to demat with the help of your broker. Liquidity is much better for bonds in the demat form even though the volumes might be low. Also, sale, transfer and the receipt of sale proceeds can happen within three days. Says Jai Adiani, founder, fpguru.com: “Conversion charges vary from one broker to another, but they are nominal. Each request would cost around Rs35-50.”
Click on Next page for questions on Jobs
Do I need to sign any documents?
THE HIT When you join a company, you might have to sign some documents. These may contain clauses dealing with financial penalties for violation of process or policies. Some companies might even want you to sign anti-competition clauses (you cannot join their competitor in the next job), or to accept an intellectual property rights clause, which means that as long as you work with them, you cannot express your views on any other platform apart from the organisation's. Else, you may face legal action.
COURSE OF ACTION Says Kamal Karanth, managing director, Kelly Services India, a recruitment consulting firm: “You may want to be careful about that (documents) if it carries financial penalties. Some of the companies would have unilateral transfer policies which can be abused. One cannot negotiate these after joining or while leaving and the implications could be damaging.”
It is said that to be forewarned is to be forearmed. By asking the right questions, you not only manage to make the right decisions, but also avoid difficult situations, such as being saddled with dud investments and products with fleecing charges and much more. Above all, it helps you stay on top of your finances. It is all worth the bother of asking questions. Don’t you think so?
(Reports by Ashwini Kumar Sharma, Deepali Penkar, Kavya Balaji, Kundan Kishore, Naveen Kumar, Pheji Phalghunan & Teena Jain Kaushal)
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