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Photo: iStock
Photo: iStock

Mistake: exotic products make you look smart

Anup Bansal, managing director, Mitraz Financial Services, tells us the several cases of financial planning mismanagement that he has seen his clients make

In April-May 2017, Mint did a survey of 19 financial advisers, to find the biggest mistakes that investors make (read here). Over the next few weeks, we will talk to more advisers about the mistakes investors make (read more here: www.livemint.com/investor-mistakes). This week, we talk to Anup Bansal, managing director, Mitraz Financial Services Ltd.

Bengaluru-based Mitraz Financial Services Ltd is just 7 years (it is a Securities and Exchange Board of India registered investment adviser), but co-founder Anup Bansal tells us that he has seen several cases of financial planning mismanagement by clients.

For starters, said Bansal, many of us tend to build portfolios on a piecemeal basis. “Clients’ funds are individual investments rather than a creation of a portfolio according to risk profile." Many investors buy one fund today, another tomorrow, yet another a few weeks later. By the time they buy their seventh or eighth scheme, these have no relevance to the first few schemes.

“Every addition to the portfolio should be in consonance with the overall goal, and keeping the risk profile in mind," he said. For instance, if an investor’s risk profile is ‘conservative’, she shouldn’t buy a sector fund, even if it becomes the flavour of the market then.

A crucial mistake that many investors make, sais Bansal, is over-dependence on equity funds and virtually no debt funds. “Fixed deposits are used for ‘safe investments’, instead of debt or liquid funds," he said. For investors in higher tax brackets, financial planners suggest debt or liquid funds to manage short-term needs, instead of fixed deposits. Similarly, many investors have only large-cap funds in their portfolios and no mid- or small-cap funds, he said.

What adds to the woes of a skewed portfolio is the presence of exotic products. Bansal said he has even seen private equity (PE) investments in many portfolios “because some investors feel exclusive and elite by putting money in such exotic products, which are marketed to high net worth clients." Investors equate complexity with higher returns, instead of going for simplicity, he added.

Many investors tend to put too much emphasis on past performance. So, apart from having sector funds in their portfolio, which Bansal says are there mostly because at some time they would have shown great performance, investors usually see past performance. “Some even go by brand names and star ratings.... They ignore good opportunities and invest at the wrong time." This, he adds, results in mutual fund schemes not being reviewed periodically. The side-effect is that “many investors have too many mutual funds with similar characteristics (and underlying stocks) but different names," he said.

That many investors are underinsured is known. But Bansal says one reason is that investors buy insurance thinking these are investment vehicles. “Apart from lack of knowledge on various investment options that provide good risk-adjusted returns, many of us have superficial knowledge based on what our friends tell us. It is a deadly combination," said Bansal, who thinks too much “mental accounting" is bad.

It’s not just about making investments. Bansal says that investors must get into a habit of planning to meet various financial and retirement goals.

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