In the highly commoditised realm of investments, the “right product for the right investor” is a custom that is more honoured in the breach than in the observance. Acquisition of the wrong kind of saving and investment products— clearly, a result of mis-buying — is fairly common. Indeed, this has been a matter of grave concern through the ages and is likely to remain so unless the investment fraternity becomes sufficiently aware of its consequences.

In a panic-stricken world ruled by the relentless march of a deadly virus, product suitability has morphed into a true hot button. Its significance is acutely felt in the myriad instances of needless buys we see all around us. An elderly investor buys a risky sector fund, a fresh college graduate holds an endowment insurance policy he will not need anytime soon, while a young professional loses money in agri-commodities he does not understand.

Even as you read this article, large quantities of resources are locked into sub-optimal investment products that are actually quite redundant. And while portfolio performance suffers, dense layers of intermediation keep forming. A thousand commissions, brokerages, loads and sundry other charges for such intermediation eat into the average investor’s returns. At the same time, a farrago of myths and untruths accumulates in the market.

While many stories on the subject have been written in the past, this may just be the time to revisit it. That is because of Covid-19 and its consequences, which have together wrecked many personal investment plans. This is also the time to look at your own portfolio and ascertain whether you hold unsuitable investment products that discourage efficient performance.

Buy right

You are the final arbiter, remember. In other words, when your personal banker brings up the subject of an NFO (new fund offer), or when your wealth manager discusses a PMS (portfolio management scheme), or when your insurance adviser refers to a pension plan, find out whether you will really gain from it.

Does the product truly fill a gap in my portfolio? You need to find the answer to this question, and it needs to be a convincing one.

In this context, the following are important considerations:

• The product should not be a mere adornment. Instead, it should actually introduce a smart, bright element to the existing array of investments
• It should not be a mere me-too product. If it leads to duplication, it has to be avoided, or, in the very least, delayed
• There should be no unnecessary additions to expenses and taxes — at the end of the day, these rank among an investor’s bitterest enemies

Ditch the pitch

If you are not convinced with the sales spiel, you need to “ditch the pitch” — deliver a firm “No” in turn. Yes, the absence of an affirmative action will rob the insurance executive or the mutual fund distributor of his earnings, but that is not your primary concern. You have to realise that you alone are responsible for your portfolio. Don’t make the latter someone else’s happy hunting grounds — not at the cost of efficient performance.

While most ordinary sales propositions are fairly cut-and-dry, some are apparently cobbled together with what can be loosely termed as “freebies”. That moniker typically derives strength from the FMCG industry. Purchase a large bottle of a popular health drink and you will get a small stainless steel cup with it. The latter, as the accompanying product label advertises, works as a gift for the buyer. For the ordinary consumer, it portrays a generous offer; in reality, it is an enticement.

FMCG-style freebies mostly come at a cost that is borne by customers themselves. The critical poser here is simple: who pays? The question assumes primacy in the investment space too when, for instance, a mutual fund comes up with an insurance add-on.

Such a deal may at first require you to set up an SIP in an equity fund for the long term. It may encompass an insurance value-addition, subject to terms and conditions. Well, we will deliver a caveat here — there must be someone who has to pay the premium for such bundled insurance. As the buyer, you need to find out whether it is you who is merrily paying for it.

Curiosity pays

The well-known story of the curious case of the dog that did not bark in the night has a lesson for investors too. When a pitch for an investment product is made, there will certainly be questions in your mind; you have to ask them before cheques are signed. Only a cautious canine will identify a random burglar before a theft is perpetrated.

In recent years, investors who have asked the right questions have been able to avoid irrelevant purchases. Few choices demonstrate this better than mutual funds. There are plenty of me-too funds in the market. If your portfolio has, for example, three large-cap funds, do you really need a fourth one?

My point is simple; an additional purchase is justified only if it makes sense. Remember, there is a glaring commonality of objectives — fund managers often tend to chase the same securities in a confined universe. So professionally run portfolios too end up with serious overlaps. The scenario holds true for debt securities as well.

The answer does not really lie in product differentiation, contrary to what some investment circles preach.

At the end of the day, it makes sense to buy hand-picked and straight-laced products representing various categories of asset classes. An intelligent investor will try to avoid me-too items disguised as nuanced versions from within the same asset class.

The writer is director, Wishlist Capital Advisors