Which is the most transparent financial product ?

A thought crossed my mind today. How do we buy financial products? Say you have Rs 50,000/- and want to park that money, where would you put it in and why?

I think most of us never bother to first think about basic things like goal based investing and asset allocation before deciding on which product we need.

A blotched understanding of how much returns the product will generate is certainly a big input in the overall scheme of things.

Most of the uninformed investors pick a financial product based on an assumed rate of return which often turns out to be incorrect.

Should not one understand about how the product functions and how it will behave in different economic conditions?

While there are many parameters for selecting a product, how many of us think about the transparency of the product ? With so many financial products in the market, which one do you think is the most transparent  ?

Take the below poll to let us know and please use the comments section to justify why.

Comments

  1. FD’s for me..

  2. I think FD, PPF etc. is the most transparent financial product because you clearly know that how much you are investing, how much rate of interest you will get, how much locking period is there, how much money you will get at the time of maturity and how much TDS will be deducted, if any. In case of FDs I even know that in case bank goes bankrupt the maximum liability bank will have is 1 lakh.

    I don’t think any other financial product provides such a great deal of transparency. It’s all about market conditions and company’s performance in other financial products, which cannot be predicted.

    • Radhey Sharma says:

      @Vivek K, Why not ULIPs ? Why do we say ULIPs are not transparent ?

      • @Radhey Sharma, They are close but not completely. First of all you don’t know the exact locking period. The product confuses you by saying you can withdraw money anytime after 3 years but it is advisable to stay invested for at least 5 years and to get better returns stay invested for 10 years or more. The investor is always tempted to book profit and withdraw money and forgets completely about his insurance [although buying insurance this way is not recommended but that’s a separate story].
        Secondly, if you want to withdraw you don’t know the administrative charges that will be deducted.
        Thirdly, you don’t know the final value that you will receive until you decide to withdraw.

        So, there is less transparency as compared to FDs since everything is crystal clear upfront.

        • Radhey Sharma says:

          @Vivek K, If I am not mistakes, all charges in a ULIPs is known before you invest in it.
          The investor’s confusion cannot be a reason for a product not being transparent.
          FD is more easier to understand than ULIP no doubt, but that does not make FD more transparent.
          FD IS TRANSPARENT but so is ULIP. No ?

          • @Radhey Sharma, Ok, I can agree with you on “The investor’s confusion cannot be a reason for a product not being transparent.” It is slightly complex to understand the ULIP charges.
            But what about the final return value? You don’t know about that upfront, do you? Whereas that is known in case of FDs.

          • Radhey Sharma says:

            @Vivek K, Should transparency of a product entail the returns of a product ?
            By transparency I meant all information needed to make sound investment decision.
            FDs give you the return information as they as tagged against a return. ULIPs by their nature don’t and so illustration is only on 6% and 10%.

            I don;t think clarity on returns should be a parameter but that is my personal opinion.

          • @Radhey Sharma, Clarity on returns is just one of the parameters of transparency for me.
            If I go by your definition of transparency [which probably is the right one if you think logically] then all products I think are transparent. Even stocks and MFs provide all the information that can help investors to make investment decision. It’s just that information is too much and require some knowledge and patience. FDs are relatively simpler to understand and hence people feel that it is the most transparent product.

            Thanks for bringing a different perspective to the transparency. :)

          • Radhey Sharma says:

            @Vivek K, I agree with your thought that all products are transparent. In fact, I wanted to see what investors think about transparency before I got this poll out.

            I think traditional insurance policies are not transparent at all.

  3. My vote goes for FD, PPF too. Agreed the rate of returns barely beats inflation but over the next few years we expect inflation to be in the range of 6-8%. The government also guarantees Rs. 1 lac of your investments incase the bank goes bankrupt.

  4. @Radhey,

    Most of the ULIP’s are not transparent and they have hidden charges. Some of the annual charges varies from 5-10%, whereas in MF its upto 2%.

  5. @Radhey,

    There are many charges in ULIP and the agents do not reveal all of them. Some of them are – Premium Allocation Charge, Allocation Charges, Fund Management charges, Policy/Administration charges , Surrender charges, Fund switching charges.
    These are some which i can think of now……

    • @Rakesh, But are these charges not mentioned in the policy document if one reads them carefully?

    • Radhey Sharma says:

      @Rakesh, All these charges are known for a ULIP upfront.

      I think the product becomes complex because of so many details otherwise ULIPs are not as un-transparent as we think they are.

      • @Radhey,

        Exactly, that’s what i was trying to say. There are so many charges that its complex for common man to understand. Moreover if you do not follow markets closely you would not know when to switch from debt to equity & vice-versa.
        I know few friends who had bought ULIP’s from ICICI sometime back and most of their investment was in debt. If they would have invested in equity couple of months back they would have earned great returns.

  6. @Vivek,

    I don’t thin the break-up of all the above charges are mentioned in the policy document. Though I don’t have any ULIP but friends who had always complained about the same.
    Moreover in ULIP’s you need to be vigilant to know when to switch from debt to equity & vice-versa. Most of them do not know that and hence cannot use it effectively.

  7. Hummmm interesting though not easy to say which one is the most transparent. Most of the products are giving information and terms and conditions also ;).

    Still, I am giving my vote to MF. As we can have all information, which stocks our money is getting invested, expense ratio, fund manager, value at any given time, MF objective, etc…. TV ads also says ‘MF investment is subject to market risk ;)’.

    I don’t have experience of ULIP. Few years back when my knowlege about investment was 0, one agent approached me with ICICI some ULIP product. I asked him few (I think many LOL) questions for quite a long time as he was not leaving me and at last he told me clearly about all fees and expenses. Finally I decided not to take it. I am happy that I asked him questions :).

    I am not saying other products are not transparent.
    Stocks – Company gives you most of the information (Q/Y results, Future Plans, Policies, any changes)

    FD – obviously transparent, Bank will let you know about locking period and interest rate. Though you have to ask how much they will cut on pre mature withdrawl ;), they will let you know.

    PPF – We know most of the things about this (interest rate, locking period). Still one has to read to get some more knowlege / benefits.

    NSC – Information is there still I think somehow people don’t know much about this. Could this be lack of transparency ? or little complicated.

    Traditional Insurance – Not sure if all information used to be given. What is covered / not covered, ….

    • Radhey Sharma says:

      @Chirag, Thanks Chirag for the wonderful inputs, really appreciated. Regarding traditional plans, I do not think they are transparent at all.

    • @Chirag, Chirag, you changed your vote from FDs to MFs? :)

      • @Vivek K, Vivek, it seems one more Chirag is in to comment on Radhey’s articles :). Congrats Radhey.

        The new Chirag has opted for FD :). I am the different guy (the same old Chirag ;) ). Even I was surprised when saw the comment on my name. I think I will put my full name in future comments.

    • @Chirag,

      Good write-up, a very bold move to stick with MF, seldom people do that.

      Rakesh

      • @Rakesh, Ya Rakesh, I was thinking about transparancy (not assurance on returns), that means even if you do bad, it should be transparent, and be transparent by saying that this product also have this risk while investing in it. Though if you read my comment, I said most of the products have (more or less) transparency :).

        Learned from Radhey that tranditional plans are not transparent.

  8. @Radhey,

    The latest poll result show’s 24 votes for FD,PPF,etc and 19 for MF.
    Have people really opted for MF as more transparency product. I’m a bit surprised.

    • @Rakesh, Actually I am happy to see MF getting more votes. It could mean [and I hope I am right] people have started realizing the importance of investing in MFs [also realized there is world beyond FDs :)] and may be they are doing proper research as well. As I and Radhey discussed and concluded above that if you read things carefully all products are transparent except traditional policies.

    • Radhey Sharma says:

      @Rakesh, Yes, I did not tweak anything !

  9. @Vivek / @Radhey,

    If its true then its really great, happy to see many people considering mutual funds as investment. Equity will always give you good returns only over a longer period of time.

  10. ULIPs used to give us many options like Multiplier, Balancer etc. but nothing is mentioned about where they are investing in case of Multiplier, Balancer etc.

    • Vivek K says:

      So, are you saying that ULIPs are not transparent with such options?

      Which financial product according to you is the most transparent and why?

    • TheWealthWisher says:

      Rajan,
      If I remember correctly, quarterly they are supposed to declare where they invest, so it is very transparent from that perspective. Did you mean otherwise ?

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