5 financial products that could cost you big – Don’t invest in them | Mint

The financial market is brimming with investment options, each with its own set of risks and rewards. However, not all financial products are worth your investment. Some carry high fees, hidden risks, or offer poor returns, making them more harmful than beneficial.

In this blog, we will explore five financial products you should avoid and explain why they may not be the best choices for your wealth-building goals.

Unit linked insurance plans

Unit Linked Insurance Plans (ULIPs) combine insurance and investment in one product, but they often fall short of both. The high fees associated with ULIPs – ranging from 8% to 10% in the first year, significantly reduce the potential returns. These fees include fund management charges, mortality charges, administration fees, and premium allocation fees, not to mention the 18% GST on premiums. Even if the fund delivers a 10% return, your investment might see minimal growth due to these hefty charges.

Why are ULIPs bad?

• High fees: ULIPs come with significant upfront and ongoing fees that reduce your returns.
• Complexity: These products can be difficult to understand, with hidden charges that may surprise investors.
• Inadequate insurance: The insurance coverage provided is often minimal compared to dedicated term insurance plans, making them a costly option.

Digital gold

Digital gold has become a popular method of investing in gold, but it comes with several drawbacks. Every purchase of digital gold is subject to a 3% GST, meaning you lose a part of your investment right from the start. Additionally, the buy-sell spread can be as high as 8%, further eroding the value of your investment. Furthermore, the platforms offering digital gold sometimes lack transparency in terms of pricing and fees.

Why is digital gold bad?

• GST on purchases: The 3% GST immediately reduces the value of your investment.
• High buy-sell spread: The price difference between buying and selling gold can result in significant losses.
• Lack of transparency: Many digital gold platforms have unclear fee structures and pricing, making it hard to assess the true cost of investing.

Peer-to-peer lending

Loans Peer-to-peer (P2P) lending platforms offer attractive returns, often promising 12% or more. However, these returns come with a significant risk: P2P platforms typically lend to borrowers who are considered too risky for traditional banks. This raises the likelihood of defaults, which can lead to financial losses. Additionally, liquidity issues make it difficult to withdraw your funds quickly, and misleading marketing often promises “assured” returns, which are not guaranteed.

Why are P2P loans bad?

• High risk: P2P loans involve lending to borrowers with poor credit histories, increasing the risk of defaults.
• Liquidity issues: Withdrawing money can be challenging due to limited exit options.
• Misleading marketing: P2P platforms often advertise high returns without clearly disclosing the associated risks.

Whole life insurance plans

Whole life insurance plans offer coverage for a lifetime, but they come with significant drawbacks. These policies are much more expensive than term life insurance, and the value of the death benefit decreases over time due to inflation. As you get older and your financial responsibilities decrease, the coverage becomes unnecessary. Whole life plans may end up being a costly option that doesn’t provide value in the long run.

Why are whole life insurance plans bad?

• High premiums: These policies are significantly more expensive than term life insurance.
• Decreasing value: The coverage’s value diminishes over time due to inflation.
• Unnecessary coverage: By the time you reach an older age, you may not need life insurance, as your dependents and financial obligations may be minimal.

New fund offers

New Fund Offers (NFOs) are mutual fund schemes launched by asset management companies, often accompanied by heavy marketing and hype. However, NFOs lack a performance history, making it difficult to assess their potential. The low NAV (Net Asset Value) of an NFO may appear attractive, but it doesn’t indicate the actual value or potential returns of the fund. Often, NFOs fail to deliver as promised, leaving investors with disappointing returns.

Conclusion

While there are many financial products available in the market, not all of them are suitable for building wealth. ULIPs, digital gold, P2P loans, whole life insurance, and NFOs are some of the products that may carry hidden fees, high risks, or poor returns. To make sound investment decisions, it is essential to research thoroughly, understand the risks involved, and consult with a financial advisor. Being an informed investor can protect your finances and ensure your wealth grows in the right direction.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited