Watch out for common mis-selling ploys by your mutual fund distributor

How many times has your mutual fund distributor advised you to buy a scheme because it is priced at just Rs 10? Or pushed a scheme based on past performance? Well, the next time you hear such statements, watch out for such mis-selling of financial products.

The most common mis-selling ploy is, of course, ‘buy a scheme because it is Rs 10’. Says Hemant Rustagi, CEO, Wiseinvest Advisors: “What you see is a mixture of mis-selling and myths. Because investors believe in some myths, people take advantage of that.”

Many investors believe in the myth that a net asset value (NAV) of Rs 10 is better, and therefore that new fund offers (NFO) are attractive, because Rs 10 means more units and as the perception is that nothing will go below Rs 10.

But that’s not true. The NAV is nothing but the value of the fund’s portfolio less liabilities divided by the total number of units. So it is not as if an NAV of Rs 140 is expensive — it merely reflects the value of the scheme’s holding. Nor does it mean that the Rs 10 NAV scheme will rise more quickly than the Rs 140 NAV scheme.

The fact is that investors are coming in at a market or index level. Now if the market rises and all things being equal, the schemes rise by 10 per cent, then, the Rs 10 NAV will go to Rs 11, and the Rs 140 one to Rs 154. So it’s the percentage increase that should be considered.

“An NAV of Rs 10 or less could even mean it’s a fund that’s under-performing,” cautions financial planner Gaurav Mashruwala.

Another mis-selling ploy is telling investors to invest in a fund before the dividend is declared, points out Rustagi. Remember, a fund can either distribute its profits as dividend or reflect it in a higher NAV. So if a fund with a NAV of Rs 50 declares a dividend of Rs 10 per unit, its NAV will naturally fall to Rs 40 after the pay-out. “People need to realise that they are also injuring their investment goals. You want your capital to grow but you’re not doing that by breaking your capital and taking out Rs 10,” says Rustagi.

Distributors also often don’t explain the risks associated with a financial product. And citing past performance to sell a product is also wrong, feel investment experts. Rather, investors must consider their risk profile and investment goals instead.

Says Mashruwala: “The current equity market run started in May 2003. So if somebody is selling you a mutual fund or Ulip showing the last three years’ performance, you need to be very careful.” Investors must guard against “new themes” too, he adds.

As investors become more aware, such mis-selling will wane, feels Rustagi. But till then, they may have themselves to blame as well. As Mashruwala says, “Investors are at fault too. They’re greedy too and not willing to spend the time to learn.”