Zero per cent schemes: How consumers get fooled

As a child when my first milk tooth fell, I was told to keep the tooth under my pillow at night. When I woke up the next morning, I was delighted to discover a one rupee coin instead of my tooth under the pillow. When I asked my parents about it, they told me that a tooth fairy had switched my tooth for a rupee coin during the night.

As a child the story had lots of appeal for me. Of course as I grew older I realised that there was no 'tooth fairy' and my parents placed that one rupee coin.

The stories surrounding zero per cent finance schemes are perhaps of the same genre. The old adage that 'there is no such thing as free lunch' aptly describes the zero-percent-interest schemes.

These schemes were widely popular till a few years back. RBI regulations advising banks to refrain from offering such schemes as well as the general withdrawal of major banks from consumer durables financing has meant that such schemes have not been in vogue for the last 2 to 3 years.

However there are several NBFCs (Non-banking financial companies) that continue to finance consumer durables purchase and also have zero per cent schemes. The main attraction of such schemes is that they influence you to purchase consumer goods that could be more expensive than your wallet size.

The lure of zero percent interest is an added attraction that makes you feel that 'YES' I am getting something free and thus I am able to buy a 'bigger and better' product. But that is just a smart way in which such schemes fool you. Here's how.

So how do these schemes work?

Unlike their names, most zero percent schemes have other costs in built. The biggest cost is that you forfeit the cash discount that you would have got otherwise from the retailer. Also you will be paying some processing/transaction fees and/or advance EMIs (equated monthly instalments).

So let us see how the costs stack up in a so called zero percent scheme.

Example: An LCD colour television costs Rs 48,000 and is available on zero percent EMI scheme for six months (thats is, there is a EMI of Rs 8,000 per month for six months). The consumer needs to pay a processing fee of Rs 1,000. If the customer had bought the same TV by making a full payment s/he could have availed of a cash discount of Rs 2,000 which s/he is not getting if s/he opts for the zero percent scheme.

So it works out like this:

Cost of television set: Rs 48,000

Amount paid/Cost incurred in advance:

Processing fees: Rs 1,000
Cash discount foregone: Rs 2,000
Total: Rs 3,000
Net finance received: Rs 45,000

Payment made by six instalments of Rs 8,000 each (aggregating in all to Rs 48,000 against finance received of Rs 45,000).

The effective interest cost works out to 23 per cent per annum.

Why consumers fall prey to zero per cent finance schemes

However the popularity of such schemes with consumers particularly in festive season cannot be denied. Market sources say that despite being costlier in some ways, consumers prefer to go for these staggered payment schemes and have been highly successful in pushing sales and expanding the market for the durables. This is primarily because of the fact that purchasing through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.

So are there any true zero per cent schemes? Yes there are.

Some of them are available on the much-maligned credit cards. The credit card that I have allows me to convert specific spends greater than Rs 5,000 into three-month EMIs without any cost or fees. This is the closest that hard-nosed bankers come to offering true zero per cent schemes. Some other major credit card issuing banks also have similar schemes.

All said and done, the best way to check if a zero per cent scheme is really worth it ask the following questions:

Any fees or charges?

If I pay full amount do I get a discount that I am not getting if I take the zero per cent scheme.

If answer to both the question is no then you have a true zero per cent scheme! So you can now zero in on your zero per cent schemes and spare yourself from being fooled.

How well do you know your Mutual Fund Basics ??

A mutual fund (MF) is a professionally managed type of collective investment scheme that pools money from many investors, that is, your money and invests it in stocks, bonds, short-term money market instruments, and/or other securities to yield returns. If you are apprehensive of investing in the stock market because of its unpredictability, play relatively safe with MFs.

You will receive units of the MFs in proportion to the money put in. The value of each unit is also impacted when management fees and other expenses are deducted from the overall pool of funds.

The value of a unit is called the Net Asset Value (NAV) of the MF which changes on a daily basis.

Investors who wish to purchase or sell units of a mutual fund after the scheme is fully functional must do so at a price that is linked to the NAV or the Net Asset Value.

Here are 12 important facts you should know about MFs.

1. How is the Net Asset Value calculated?

The Net Asset value (NAV) = (Market value of the fund's investments + Receivables + Accrued income Liabilities - Accrued expenses)/Number of outstanding units.

2. What is a Systematic Investment Plan?

A systematic Investment Plan or SIP is an investment strategy wherein you can invest into a mutual fund at specific intervals over a defined time frame. You can select the investment frequency for your chosen SIP, either monthly or quarterly.

Since a fixed amount is invested on a regular basis, you get more number of units in a falling market and fewer units when the market is on the rise.

This will also help you to smoothen out the market fluctuations and the investment will be low cost investment over a period of time. This strategy of investing is also called Rupee Cost Averaging.

3. What is Systematic Withdrawal Plan (SWP)?

The systematic Withdrawal Plan (SWP) is a facility available to the investor to withdraw funds at regular intervals.

4. Are there any sector-specific funds or schemes?

There are some sector specific schemes. Some funds/schemes invest in the securities of only those sectors or industries as specified in the offer documents. It could any sector such as pharmaceuticals, software, fast moving consumer goods (FMCG), petroleum stocks, etc. In such schemes, the returns are dependent on the performance of the respective sectors/industries.

These sector-specific schemes may give higher returns, but the investment in such schemes is riskier compared to diversified funds. As an investor, you need to be vigilant and keep an eye on the performance of the specific sectors/industries. In such schemes, it becomes extremely important for you to exit at an appropriate time. You may also need to consult an expert regarding these investments.

5. Are investments in mutual fund units safe?

Any stock market investment is inherently risky. Different funds have different risk profiles that are clearly specified in their objectives. Funds that are low risk invest generally in debt, which is safer than equity investments. Mutual funds have access to services of expert fund managers another assurance to the investor that your money is in good hands.

6. How much should I invest in debt or equity-oriented schemes?

As an investor, you should take into account your risk-taking capacity, age, financial position, etc. Schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. You may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.

7. How do I fill up an application form of a mutual fund scheme?

You are required to mention clearly your name, address, number of units applied for and other relevant information as required in the application form. Also provide a bank account number to avoid any fraudulent encashment of any cheque/draft issued by the MF at a later date for dividend or repurchase. It is important to make sure that the MF company is apprised of any change in your address, bank account number, etc.

8. Can mutual fund units be purchased after the cut-off time?

To be able to get the NAV of the same day, you must purchase the MF units inside the cut-off time of that scheme. Delay on this part will mean that you will only get the next day's NAV. Also, if the next day happens to be a holiday, the NAV of the next working day will be applicable.

9. Under which sections of the Income Tax Act can tax benefits for investing in mutual fund units be claimed?

Dividend income from MF units is exempt from income tax with effect from July 1, 1999. Investors can claim tax rebate under section 88 of Income Tax Act, 1961 with investments in Equity Linked Saving Schemes (ELSS). Tax benefits will also be available under section 54EA and 54EB with regard to relief from long-term capital gains (LTCG) tax in specific schemes.

10. When does an investor get a certificate or statement of account after investing in a MF?

Mutual funds are required to send out certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme.

In case of close-ended schemes, the investors can get a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.

11. How long does it take for transfer of units after purchase from stock markets in case of close-ended schemes?

Securities and Exchange Board India (SEBI) regulations require that transfer of units be done within thirty days from the date of lodgment of certificates with the mutual fund.

12. Is there a body that handles investor complaints redressal?

The name of contact person to approach for queries, complaints, or grievances is mentioned in the offer document. Trustees of a mutual fund also monitor the activities of the mutual fund. The names of the directors of asset management companies and trustees are also given in the offer documents.Investors can also approach SEBI for redressal of their complaints. Once the complaints are received, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved.

HAPPY INVESTING !!