Financial Products : A Web of Intricacies

Financial products for a common lay man means investment avenues and the persons who help them for making these decisions are called financial advisers, but in marketing perspective are simply sales men. Financial products have been under greater scrutiny since the economic meltdown in 2008-2009. So there are lot of issues in the public domain where the mis selling happened in them. So by this article lets look at some of the aspects of this area of marketing in recent years.

Financial Products are of lot of types namely Life Insurance, Mutual Funds, bonds etc. a few .Each of them are having distinct characteristics and are suited for different individuals . Lets start with looking at the product that is most associated with our lives i.e life insurance products . Life Insurance products are the most accused area where misselling has happened. When the economy and share markets were at an all time high then the Ulips which combined equity exposure with life insurance were sold to the financially uneducated customers as a short term investments of 3-5 years with the concept of front loading of charges which was fine until the bourses was in continuous upswing so the investors were seeing their unit value going up, but when economic crash happened the value of the units came crashing down eroding even the invested capital leading to lot of customers feeling cheated. Then only IRDA came into picture to bring some regulatory framework into Ulips, but the damage was done to the trust on insurance companies. Then only murkier business of commissions to agents and distributors came into picture.

When the ulips faced flak then insurance companies and distributors started pushing traditional schemes which were having very little cover with 5-6% returns. These policies are also having large amount of first year premium going into commission of distributors. Actually the issue is the customers should have been given complete information about the pros and cons of each product, so that the informed choice was made by the person.

Now let us look at the second avenue of mutual funds where money collected from investors are jointly been used for investing in stock markets under the supervision of a professional manager for a small fee every year. The regulations guiding them are very strict and the working of mutual fund is also very transparent. But since they are directly investing in stock markets when the economic crash happened only 5% of them were able to withstand the pressure of falling markets with lot of people hard money got stuck in them, people were so afraid that even in 2013 when the markets are bouncing back the investors are selling their units. This shows the lack of education of capital market working.

OK after talking a lot of stock market related instruments let us look at our old age saving instruments like fixed deposits etc. Fixed Deposits offer a good amount of returns but the interest is taxable which effects its ability to beat down the existing high inflation. But still for lot of Indian families prefer FD 's to at least protect the capital that they are investing as they are backed by guarantee of rs 1 lakh.

Then in the last the relatively unknown territory of bonds and debentures. They are vasically debt instruments which are used by government and corporate to raise money through a debt of fixed coupon rate . They are rated by various international and national rating agencies, the catch here for investors is to not get in the honey booby trap of higher rate of return for higher risk. So the investors in this case have to research at the company fundamentals and the need of money and their ability to return the money with the interest rate.

Now let us look at the very popular Public provident fund or PPF . it is a long term instrument of 15 years where the rate of interest is nearly equivalent of the fixed deposits but with an advantage that the returns are completely tax free. So if you want to invest in high grade debt instrument , then this is for you.

So my last advice to all my web friends is to know the pros and cons of each financial instrument and then invest for successful future .