How To Identify Unrealistic Promises To Safeguard Your Investment

Many people who have sizable deposits in their bank accounts frequently experience this situation: their relationship manager with the bank suggests a good investment that will give them a strong rate of return. Another situation is when people are looking for an investment option to deploy their surplus funds and an insurance agent tells them about a dream product that has all that they are looking for.

In all these cases, it becomes very important to know the full features of what they are being sold because the reality might be something different from what they might be expecting.

Here is how you can protect yourself from false promises and prevent a loss for your finances.

The key part of any action for an investor is their specific requirement. It is seen that many times, the requirements of the individual are completely different from what is being suggested.

For example, you might be looking for a one-time investment in a lump-sum amount that you have for a certain time period. If the bank relationship manager suggests an option that turns out to be an insurance policy, then this is not the right investment for you. The deception here is that the insurance policy has a name similar to a mutual fund. The main reason why this investment is unsuitable is that it requires an additional investment every year until the premium-paying term is over. Otherwise, the policy benefits will be lost. This is a clear situation where the individual is not getting what they actually require.

One has to understand whether the returns that the intermediary or seller of the instrument is talking about are just an illustration or an actual figure. There are two situations that are commonly seen in this regard. In one case, where it concerns mutual funds, the past return that has been earned by the fund is assumed to be what will be earned going forward. In reality, this might not be the case, as market conditions in the past and future can be completely different. Here, the assumption of the investor can turn on their head, leading to huge disappointment.

In another example, the person selling the investment is using a specific rate of return for the purpose of illustration, when the actual rate of return might not be anywhere near what is being shown to the investor. The investor has to make this distinction between an illustration and reality very clear, because the intermediary mentioning a figure does not translate to the actual returns that they will earn.

There are times when even the actual figures that are shown in the calculations differ from what the seller of the investment is actually promising. This is especially true when it comes to payouts over longer periods of time. The way to actually calculate the return is to look at the internal rate of return of the investment, and this depends on when the cash outflows are present and when there are inflows. The investor might be promised a far higher rate of return, but they need to understand that this is not guaranteed at all because it is not possible for the entity managing the money to earn this kind of return and then pay the investor. The best way to tackle this situation is to look at the actual calculations and see what returns are actually present based on the amounts coming back.

There are a lot of cases, too, where someone you know actually comes and talks about a great investment that has a certain rate of return. This could be a relative, a neighbour, or a friend. Just relying on someone else to do your homework can prove to be very costly, and it is important for you to understand the actual situation. Otherwise, there is a very good chance that reality will be nothing like what has been promised, and there will be a lot of disappointment later on.

Arnav Pandya is the founder of Moneyeduschool