What is the mis-selling of mutual funds, insurance, and financial instruments? How to avoid it?
&imwidth=600&imheight=450&format=webp&quality=medium "What is the mis-selling of mutual funds, insurance, and financial instruments? How to avoid it?")
One must remain vigilant against such tactics and avoid falling prey to ambitious agents. Photograph: (Representational)
What is mis-selling: Mis-selling happens when the agent or agency hides the complete picture and sell products that are not suitable for their customers. Here's what should be done to avoid mistakes that can prove costly and trigger financial losses.
Mis-selling financial investment instruments has become a notoriousproblem in India's financialmarkets. Agents representing several companies misrepresent data and make false promises to sell their products, including mutual funds, bonds, personal loans, and insurance. Often, insurance is pitched as an investment, and unit-linked and endowment plans are sold to unsuspecting customers despite poor returns. Many times, the agents mis-selling financial products are friends or relatives of the consumers. For instance, take the case of Rajeev Agarwal, 39, who trusted a friend's advice.
What is mis-selling?
Agarwal told ET that he bought an insurance plan at the insistence of a close friend who was also an insurance agent. He said the agent told him that the policy would offer both insurance and investment. He signed for the policy based solely on the advice of his friend. He now repents. He says that an annual policy with a premiumof Rs 35000 provides him with a cover of only Rs 8 lakh.
He said the policy was structured in a way that the agent would receive his commissions for life. He said he would have received way better returns if he had invested in a mutual fund.
He was duped into buying the insurance with a promise of 12 per cent returns and tax benefits, employing fear tactics that if anything happened tomorrow, his family would be in financial dire straits.
A similar incident took place in 2020. Investors lost Rs 8400 crore when YES Bank’s AT-1 bonds were written off during a moratorium. Market regulator SEBI had received a flurry of complaints from investors that they weren't made aware of the risks involved.
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A 2022 study by Dvara Research, a Chennai-based independent policy research institution, revealed that only 50 per cent of respondents agreed to buy the bonds when the risks were not disclosed. The number dropped to 13 per cent when the risks were revealed.
The paper also highlighted the plight of Gaurav Santoshwar, 44, who bought afake health policy. A discount plan was pitched as health insurance. He paid up Rs 35,400 for a non-existent policy for two years.
According to a 2025 survey, 1,655 bank relationship managers (RMs) claimed that their senior employees regularly asked them to mis-sell financial products. Nearly 85 per cent of participants did not know the difference between regular and direct mutual funds. It reported that 67% failed to distinguish between term and endowment life insurance, while 75% believed that unit-linked insurance plans (Ulips) were superior to mutual funds.
Even if their products were not suitable for customers, banks promote those linked to their companies. They serve the company, not always the interests of the customers.
They do this, ET reported, because of sales pressure.
Ankit Garg, CEO, Wealthy Nivesh, said some banks and their relationship managers may manipulate verification details to meet targets and earn rewards. He said in a case, a customer visited the bank to renew an existing policy, but was issued a new policy without consent. The RM had used his phone number to complete the verification. When the customer complained, the RM took out money from the customer's mutual fund and tried to pass it off as a policy refund.
Shinjini Kumar, former country head, Citibank India, blamed the "fundamental asymmetry of information between sellers and buyers".
Mis-selling happens when the agent or agency hides the complete picture. They don't tell their customers the fee, the risk, and the slow growth of their corpus due ot theircommissions. Often, agents claimed that the market-linked plan would double the customer's money. In reality, no market-linked plan can make such promises.
How to safeguard from these tactics?
One must remain vigilant against such tactics and avoid falling prey to ambitious agents who mis-sell to advance their own careers.
Harsh Gahlaut, Founder & CEO, FinEdge, said that regulations alone cannot fix the problems if investors are not aware of them. "Greed and gullibility often contribute to mis-selling, as people fall for schemes that seem too good to be true," he told ET.
Shenoy of Anand Rathi Wealth said customers are often burdened with long policy documents and brochures, and uncomfortable details like risks are hidden in fine print. Investors should get easy-to-read scheme documents that play up all crucial details.
Investors should be clear about what they want from a financial institution. They should read the fine print and question the agents about every small detail about the plans being sold to them. Don't believe any figures quoted by agents.
What to do if you are being sold the wrong products?
File a written complaint with the bank, NBFCs, or insurance companies. Keep all e-mails, policy documents, and call recordings. Escalate to the regulator, if needed. Approach the RBI if your complaint remains unresolved. For mutual funds, talk to SEBI. For insurance, contact IRDAI.