After the crash of 2008, there was a massive exodus of investors from capital market-based products. It was subsequently revealed that the worst of value destroying and toxic products were hard-sold by banks and market intermediaries to gullible investors. Debt funds are touted as being safe—as fixed deposits with tax benefits to boot. Investors are not informed about the risk to principal, especially when interest rates are fluctuating and probably on the decline. Financial intermediaries are hard-selling non-convertible debentures of financial services intermediaries or realty firms with high returns (of 18% and above) without explaining the risk.
The third biggest hard-sell by banks is ‘structured products’. These usually combine a debt product with a derivatives product—often, with ordinary results. However, high commissions to intermediaries ensure that they are pushed on to the more wealthy bank customers. Another popular offering to the ‘wealth management’ customers of banks are fixed maturity plans (FMPs). A dipstick study would show that a majority of customers don’t even check the underlying debt, because they depend on the bank for guidance. Finally, there are the unit-linked insurance products, which are still a favourite, although sold less aggressively. A simple question to ask is this: why would your bank want you to move away your fixed deposits into third-party products? Does it not want your business? If the answer you get from the bank satisfies you, then go ahead and risk your money.