How to Evaluate a Financial Product Before Buying It

Meera keeps being sold solutions to unnamed problems

Meera has been offered four things this year: a plan for her children's education, a policy that would "take care of" her parents' medical costs, a tax-saving investment in March, and something a colleague swears by that she could not describe afterwards.

Each was presented as a solution. Not one conversation began by establishing what problem she was trying to solve, and in three of the four she could not have stated it herself.

That is the most common error in buying financial products, and it happens before any product is examined: buying a solution before naming the problem.

Start with the job, not the product

A financial product does one of a small number of jobs. It grows money, protects against a specific loss, provides income, holds money safely for a short period, or lends you money. Each job has a best-in-class answer that is usually simple and usually cheap.

So before evaluating anything, write the job down in a sentence. I need somewhere to keep eight months of expenses where it cannot fall in value. Or I need my family to receive enough to live on if I die before my children are earning.

Once the job is written, most products disqualify themselves without further analysis, because they do not do that job or they do it alongside something else you did not ask for. This is also the defence against the most expensive category of mistake — a product bundling two jobs, which almost always does both worse than two separate products would while making the cost of each impossible to see.

The eight questions

Apply these to anything: a fund, a policy, a deposit, a bond, a loan, or a scheme with a name you have never heard.

What exactly do I own, and who owes me what? Behind every product is somebody with an obligation. A deposit is a bank's obligation. A fund is a share of a portfolio, where nobody owes you a return. An insurance policy is a contract to pay on a defined event. If you cannot state who owes you what, under what conditions, you do not yet know what you are buying.

What does it cost, every year, in rupees? Convert every percentage into money on the amount you would actually invest, and multiply across the years you would hold it, including entry costs, annual charges and exit costs. Percentages sound small by design.

How do I get out, when, and what does that cost? Lock-ins, notice periods, exit loads, surrender values, penalties. Ask specifically what you receive if you stop in year one and in year three — with long-term products that answer alone often ends the discussion.

What is the worst permitted outcome? Not the worst that has happened; the worst the contract allows. Can the value fall? Can payments be suspended? Can the issuer default? A seller who says there is no worst case has not read it either.

Which numbers are guaranteed and which are illustrations? Draw the line explicitly, and ask which clause creates each guarantee and who is obliged to honour it.

How is it taxed, going in, while held, and coming out? Tax frequently decides which of two similar products is better and is the thing most often left out of a comparison. Check current rules against a primary source rather than a sales document, which may be years old.

What is the simplest alternative that does the same job? Everything has one. If a complicated product cannot beat the simple alternative on a like-for-like comparison, the complexity is being paid for by you.

Who is paid what for selling this to me? Ask directly, and ask what they would receive from the simple alternative.

Reading the illustration properly

Sales illustrations are usually compliant and usually misread.

The projected figures rest on assumptions — a growth rate, a holding period, charges continuing at current levels — so ask which assumption produced the number being discussed, and ask to see the lower scenario, which the rules generally require to be shown and which conversations tend to skip.

Then check the base, because a "bonus" or "addition" expressed as a percentage may be calculated on a base much smaller than what you pay in, turning an impressive-sounding rate into a modest amount. And check the period, since a figure "over the term" is not an annual return and the difference is enormous.

Signals to stop

Guaranteed or assured returns on anything market-linked. Pressure to decide before a deadline, especially a tax deadline. A recommendation made before anybody asked what you already own. Charges not stated in writing. Any product you could not explain to a friend in two sentences. Insurance and investment bundled, unless you can say why that is better for you. And payment to an individual or to an account not in the institution's name.

Comparing two products honestly

When it is down to two, put them side by side on the same terms — this is where most comparisons quietly cheat.

Same amount, same period, same assumed rate of return. All costs included on both sides. After tax, on both sides. Same treatment of what happens if you stop early. And if one includes insurance and the other does not, add the cost of buying that cover separately to the one without, so both columns are doing the same job.

A comparison assembled that way is usually decisive within minutes, which is precisely why sales conversations rarely offer one.

The delay rule

Adopt one rule and it will do more than everything above: never buy at the meeting.

Take the documents. Read them somewhere else. Decide later. Almost no legitimate financial product is worse for a week's delay, and almost every unsuitable sale depends on not having that week.

If something genuinely expires — a deposit rate, a tax deadline — the loss from waiting is small and calculable. The loss from committing to a twenty-year product you did not understand is neither. Meera's March purchase was the one bought against a deadline, which is not a coincidence.

What to take away

Write the job down first, in a sentence, before looking at any product. Then ask what you own and who owes you what, what it costs each year in rupees, what leaving costs, what the worst permitted outcome is, which numbers are guaranteed, how it is taxed, what the simple alternative is, and who is paid for selling it.

Compare like with like — same amount, same period, after all costs and tax. And take the papers home. The twenty minutes this takes is the best-paid twenty minutes in personal finance.