Check for these warning signs to steer clear of bad investment products

"My relationship manager has spoken to me about this zero coupon bond that will provide me a post-tax return of 9%. Should I invest money in it?" Suresh, one of my recent High Net worth Individual (HNI) clients, asked me this question on a phone call. He sent me the detailed product communication for my comments and recommendation.

As an investment advisor dealing with HNI clients, one of the things that you necessarily have to do is to advise your clients on the various investment opportunities that are pitched to them. The relatively well-off people are deluged with investment opportunities pitched by their "bank relationship managers" or "wealth managers" of various persuasions, who are mostly insurance agents in disguise, or through high-decibel advertising campaigns.

The incessant pitching proves the old adage that a rich man and his money are invited everywhere, of course with a hope that he would part with a small portion of his wealth. If you are able to distinguish the less-than-useful investment opportunity from the deluge of investment opportunities pitched to you, it is a great first battle won as your hard-earned money is not wasted.

I have devised a small checklist that allows me to easily sort through this deluge to discard the less-than-useful schemes from the ones that require more attention. This checklist can prove useful to investors as well.

Any investment where the absolute amount of return (not percentage) is highlighted should be a big warning signal, especially if the return is promised long after the investment is made. Sample this - "Invest Rs 8,500 per month for the next 40 years and get back Rs 40 lakh plus a pension of Rs 1,00,000 per month for the rest of your life". It looks very attractive till you do the math and then also see all the conditions that apply to the offer.

Clearly, if an investment is providing a high return, the advertisement will highlight the return percentage, not the absolute amount of return. If any investment scheme over-emphasises the words "guaranteed", it is a sure shot warning sign. You can be sure that there is an asterisk (conditions apply) in there somewhere. Another easy way to spot a bum deal is the absolute zeal with which it is pitched to you. If the sales person is willing to come many times to your out of way office or home, it should put the red flag up. Though our sense of social etiquette frowns on it, a blunt question on how much commission the salesperson (or her employer) is making is enough to separate a good investment product from a not-so-good one. A lot of product companies pitch their sophisticated investment products to investment advisors like me (for onwards sale to our clients) and if the commission for us is higher than 1-2%, it is a warning sign for me to avoid the product as it is unlikely to be good for the investor.

I also realised how a large part of an investment advisors' job is to steer the clients off from low-yielding investment decisions designed with the distributor in mind. There is a great need to educate clients on how to identify the more obvious low-yielding investment products. All these filters are actually plain common sense and you can save a lot of time for yourself and your investment advisor if you apply them yourself.

So, what did I tell Suresh whose question had started off this column? You will notice that none of the warning filters applied to the investment scheme outlined by him and I sought more details. It was an interesting investment opportunity but in the ultimate analysis not suitable for Suresh. But that is the subject matter of another article.

The writer is a CA and Sebi-registered investment advisor. His twitter handle is @Harshroongta. You can also send him your queries related to personal finance at personalfinance@dnaindia.net