Sunday, April 27, 2008

Avoid complicated products

Many financial institutions design complicated products that lock you up for many years and give you a poor yield.

They pay a high commission (taken from your investment) to the marketeer, which could be an insurance agent or the relationship manager of a bank.

To hide the poor yield, they introduce several complicated features to distract the investor. If they are transparent, they will never be able to sell the poor yielding product.

Many life insurance products introduced in recent years are designed to be complicated and non-transparent. They give a poor yield to the policyholder.

Some products may give a fairly decent yield, but it comes with high risk. For example, if the underlying investment is risky and can earn a gross yield of 7%, the investor may get a net yield of only 3%, after deducing the high charges which takes away most of the gain. Usually, the investor is not aware about the high risk, as it is hidden in many pages of a complicated document.

Lesson: Never invest in any complicated product, even if it is sold by your trusted bank. Instead, you should invest in transparent product, such as stocks or bonds that are transacted through the stock exchange. If you invest in fixed deposits, you can check the interest rate offered by various banks.

3 comments:

  1. Is Unit Trust considered as complicated product?

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  2. ...but most, if not all, investment products are complex, with thousands qualifying clauses to protect the investment companies. So, in the meantime, I put my money in fixed deposit, with interest less than 1 %, not even cover the inflation.
    Sigh !!!

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  3. Just buy term insurance and invest the rest. Invest in stocks, commodity or low cost unit trust. Never treat investment linked policy as instrument for investment. Investment linked policy is costly as you have to pay a lot every month. When you run into financial difficulty and want to terminate, you may find yourself unable to buy another cheaper insurance if you have a medical condition. This is my advice: Do not mix insurance with investment.

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