When people go out to buy a book, they will doggedly rummage the bookshelves for that favourite author and try to ferret out that one book that they have been dying to read. Part of the excitement is in that chase — the rarer the book, the greater the pleasure in the hunt. But isn’t it surprising that when it comes to making investments — either for the children’s marriage or the retirement plan — people never seem to show the same diligence.

That’s when you scurry to your agent who feeds on your trust and your money and, more often than not, persuades you to shovel your cash into a mutual fund that doesn’t meet your requirements.

Here’s a close look at how you can be taken on a wild goose chase and, in future, watch out for tell-tale signs.

Lure of incentives

“Higher the incentive, better the scheme”: that is the spiel that the agents use to mislead the investors in order to hawk the schemes that offer the highest incentives. The process involves sharing the commission received on sale of a product with the investor: it’s a trick that is as old as the mutual fund market.

Let’s take an instance: an investor invests Rs 30,000 in a mutual fund and the commission on that sale is 2 per cent i.e. Rs 600. The agent shares a part of it — anything between 25 per cent and 75 per cent, depending on the size of the investment and the relationship with the client.

Although the Securities and Exchange Board of India (Sebi) has banned any form of rebating, several ‘distribution incentives’ are rampant even now. In today’s market, it has been transformed into a sales strategy.

Glorious past

Equity funds are all the rage today, riding high on last year’s bull romp on the market: a year ago, it was the debt funds’ day in the sun. Typically, agents will talk of how well a fund has done in recent times to inveigle you into parking your money in that fund. Here’s the caveat: last year’s returns were good for last year’s investors. In the past year, equity funds ratcheted up phenomenal returns but it’s unlikely to be repeated this year. In a positive market, the returns are expected to be around 25 per cent this year. So, when an agent tells you that you’ll get an outlandish return next year because of how the fund performed last year, show him the disclaimer that every fund has to publish: “Past performance may or may not be sustained in the future."

Early bird

The typical twaddle of an agent is that you may miss the gravy train if you don’t hop on now. Years after the launch of the Morgan Stanley Growth Fund and US-64, agents still advise investors to invest in a mutual fund’s IPO because they could miss out on a great opportunity.

But those two were closed-end schemes and, therefore, not open to subscription after the issue closed. Now, however, all the funds are open-ended and the argument doesn’t work any more. All open-ended schemes are available at NAV-linked prices and can be bought by anyone, anytime, anywhere. So ask your agent, what’s the rush?

Also, mutual funds can collect funds in excess of the ‘targeted amount’ details provided in the offer document, which can be misleading. There is no fear of your application getting rejected or being allotted fewer number of units than you applied for, as is the case with stocks IPOs.

Next big thing

Higher commission is not the sole reason why an agent plugs a scheme. Another determining factor is that the agent could be thrusting up to his next incentive slab for drumming up new business. Mutual funds generally have slab-based brokerage structures, with higher brokerage rates for larger business.

There are other gifts, like a trip to an exotic location, a motorbike or a latest mobile phone to be won on doing business above a certain level.

What you aspire to do with your investments tomorrow is achieved by your agent today!

Efficient juggling

Active portfolio management is the sophisticated term for fund swapping, which is again used by distributors to meet the quarter’s target or to reach the next slab of brokerage.

In simple terms, the same money is rolled over across various funds. For instance, X invested Rs 10 lakh in a fund in the month of February. In the month of November, the agent cannot meet his target, or is short of the next slab by Rs 10 lakh. So, although the fund is performing well, he asks the investor to repurchase the amount and invest in another fund. The investor could suffer two types of losses: one, he may have to pay a load and, second, he may lose out on the fund’s good performance. So, be careful when someone asks you to quit your fund before your investment period is over.