Mis-Selling in Mutual Funds and Insurance: How to Spot It Before It Costs You

Last Updated on April 23, 2026 by teamtfl

A client came to me after losing nearly Rs. 8 lakh. He had not lost it in a market crash. He had lost it across a ULIP he did not need, three NFOs his banker had recommended in a single year, and an endowment plan sold to him as a “retirement product.” Each sale had been perfectly legal. None of it had been in his interest.

This is mis-selling. Not fraud. Not illegal. Just the systematic practice of recommending products that serve the seller’s interest over the buyer’s. It is the most common and most expensive financial mistake Indian investors make.

After 25 years of reviewing client portfolios, I have seen the same tricks used repeatedly. They look different on the surface each time. The underlying motive is always the same.

Table of Contents

• Mutual Fund Mis-Selling: 8 Tricks to Know
• Insurance Mis-Selling: 9 Claims and the Truth
• New-Era Mis-Selling: What Has Changed Since 2020
• Why Smart People Fall for Mis-Selling
• How to Protect Yourself
• Frequently Asked Questions

Mutual Fund Mis-Selling: 8 Tricks to Know

1. The NFO Push. A New Fund Offer is almost never a reason to invest. A new fund has no track record. The only thing new about it is the opportunity for the distributor to earn a higher upfront commission. If an advisor is excited about an NFO, ask why they are not equally excited about an established fund with a 10-year track record holding similar securities. The answer reveals the motive.

2. Buying After Dividend Announcement. “The fund just declared a dividend, now is a great time to invest.” This is backwards. When a mutual fund declares a dividend under its IDCW option, the NAV falls by exactly the dividend amount on the ex-dividend date. You are not receiving extra money. You are receiving your own money back, and then paying tax on it at your slab rate.

3. Churning. Moving your money from one fund to another every 12 to 18 months generates a fresh commission for the distributor on every transaction. For you, it generates exit load charges, capital gains tax, and a portfolio that never gets the benefit of long-term compounding. If your advisor recommends switching funds frequently, ask for a written rationale tied specifically to your goals.

4. Market Timing Claims. “Markets are about to correct, you should wait.” If a distributor could reliably time markets, they would not need to sell mutual funds for commissions. Any advisor claiming market timing ability is either deluded or manipulating you into a transaction that suits them.

5. STP Through a Monthly Income Plan. Setting up a Systematic Transfer Plan from an MIP to an equity fund creates two transactions where one would do and generates two rounds of commissions. There is rarely a genuine financial reason to do this when a direct SIP into the equity fund achieves the same result more simply.

6. ELSS When No Tax Saving Is Needed. Pushing ELSS to someone already in the new tax regime (where 80C deductions are unavailable), or to someone who has exhausted their 80C limit through EPF and home loan principal, is pointless for the investor and profitable for the distributor. ELSS is a good product in the right context. In the wrong context it just creates a 3-year lock-in you did not need.

7. Low NAV as a Buying Signal. “This fund has a NAV of Rs. 12, that is much cheaper than the Rs. 180 NAV fund.” NAV has no bearing on future returns. A Rs. 12 NAV fund and a Rs. 180 NAV fund with identical portfolios deliver identical returns. The number of units is irrelevant. Total value and return percentage are what matter.

8. Multiple Applications in the Same Fund. Some distributors split a single investment into multiple applications to earn per-application incentives. You end up with several folios in the same fund with no diversification benefit, just extra confusion managing multiple statements.

“If you do not understand why you are being asked to do something with your money, that is a signal to stop. Not to trust the advisor more. To understand more. Complexity in financial advice is almost always the product of someone’s commission structure, not your financial needs.”

Insurance Mis-Selling: 9 Claims and the Truth

Claim: “Pay for just 3 years and you are covered for life.”
Truth: This applies to ULIPs. After the 3-year mandatory premium period, the policy continues only as long as units remain to pay monthly mortality charges. As you age, those charges increase. If your fund underperforms, units get exhausted and the policy lapses. You are not covered for life. You are covered until the fund runs out.

Claim: “Pay for 3 years and the product will double your money.”
Truth: After agent commissions of 15 to 40% in early years, annual fund management charges, policy administration charges, and mortality charges, achieving double-digit returns in a ULIP is extremely difficult. The illustrated returns are almost always calculated at a pre-charge level that does not represent what reaches your account.

Claim: “Last date is tomorrow, this offer closes forever.”
Truth: Artificial urgency is a manipulation technique. Insurance products do not disappear. The only thing that expires with the deadline is the agent’s sales target. Never make a financial decision under manufactured time pressure.

Claim: “There are no allocation charges in this policy.”
Truth: There is no free lunch in financial products. If it does not charge an “allocation charge,” look for Policy Administration Charges, Premium Allocation Charges, Fund Management Charges, Mortality Charges, and Surrender Charges. The names change. The extraction of your money does not stop.

Claim: “Past performance of this policy has been excellent.”
Truth: There is a critical difference between the fund’s investment performance and what the policyholder actually received. After all charges are applied, policyholder IRR on traditional and ULIP policies has historically been far lower than the headline fund return shown in illustrations.

Claim: “This is a child education plan / retirement plan.”
Truth: Naming a product after an emotion is a sales technique, not a product differentiator. A diversified equity mutual fund SIP with a matching timeline almost always outperforms a “child education plan” on actual corpus delivered, at lower cost and with more flexibility.

Claim: “Guaranteed minimum return of X%.”
Truth: If it is not written in the policy document, it does not exist. Verbal assurances of returns are not legally binding. The “guaranteed” portion in most traditional policies is a modest sum assured that grows at a rate lower than inflation. Read the benefit illustration, not the sales pitch.

Claim: “Insurance is free in this plan.”
Truth: Mortality charges are embedded in every insurance policy. In a ULIP, they are deducted monthly by cancelling units from your fund. In a traditional plan, they are priced into the premium structure. Insurance is never free.

Claim: “The guaranteed returns are very good.”
Truth: Ask what the guaranteed return is in rupee terms at maturity, then calculate the IRR on your actual premiums paid. For most traditional endowment and money-back policies sold in India, the IRR works out to between 4% and 6%. A savings bank account offers better liquidity on similar capital. Guaranteed does not mean good.

New-Era Mis-Selling: What Has Changed Since 2020

The classic tricks above have been around for decades. Three newer patterns worth knowing in 2026:

Guaranteed income plans sold as retirement solutions. These products promise a fixed annual income from a future date. The illustration looks attractive. The IRR, when calculated correctly including the opportunity cost of locking premiums for 10 to 20 years, typically underperforms an equivalent SIP by 3 to 5 percentage points annually. For a retirement-focused investor in their 40s, that compounding gap is devastating.

Index funds with high expense ratios. The genuine passive investing revolution has been accompanied by products labeled “index” or “passive” that charge 0.5 to 1% expense ratios when true index funds charge 0.1 to 0.2%. Always verify the Total Expense Ratio before investing in any fund marketed as passive.

PMS with undisclosed fee structures. Portfolio Management Services marketed to HNI investors sometimes present performance figures gross of fees while downplaying annual management fees, performance fees, and exit loads. Always ask for net-of-fees performance across multiple market cycles before committing.

Why Smart People Fall for Mis-Selling

The investors I have seen most damaged by mis-selling are often the most educated and financially successful. They fell for it because of specific behavioral vulnerabilities, not ignorance.

Trust in authority is one. A large bank’s relationship manager carries institutional credibility. The assumption is that a large bank would not recommend something harmful. This assumption is wrong. Relationship managers have sales targets and earn incentives on products sold, just like independent agents.

Social proof is another. When a colleague says “my banker got me into this scheme and the returns are great,” the investment feels validated. What they rarely share is the full IRR over 7 years after all charges.

And complexity intimidation. When a product is explained with enough jargon and charts, many intelligent people assume their confusion is their own limitation rather than a feature of the product design. In financial products, unnecessary complexity almost always hides cost. If you cannot explain the product in two sentences, do not buy it.

How to Protect Yourself

Ask one question before every financial product purchase: “How does the person recommending this get paid, and how does that affect what they recommend?” A commission-based advisor recommending a regular mutual fund plan earns trail commission on your AUM. That is a legitimate disclosed model. A banker recommending a ULIP earns significantly higher upfront commission than they would on a term plan plus mutual fund SIP. That is a conflict of interest worth understanding.

Calculate the IRR before buying any insurance product that doubles as an investment. Take the premiums, the maturity value, and the timeline. Use any online IRR calculator. If the result is below 8% over 15 or more years, the product is almost certainly not competitive with alternative uses of the same capital.

Read the benefit illustration for insurance products. These are regulated documents. The illustration must show returns at 4% and 8% assumed fund growth. The 4% scenario often tells you everything you need to know about downside risk.

For any product you are unsure about, get a second opinion from an advisor who does not earn a commission on the recommendation. The right financial advisor makes all the difference between a portfolio built for your goals and one built for someone else’s incentives.

Frequently Asked Questions

What is the difference between mis-selling and fraud?
Fraud involves deliberate deception or falsification. Mis-selling is typically legal but unethical, involving selective disclosure, misleading emphasis, or recommendations driven by commission rather than client interest. You can approach SEBI, IRDAI, or AMFI’s grievance channels if you believe you were misled.

Can I get my money back if I was mis-sold an insurance policy?
IRDAI mandates a 15-day free-look period for all life insurance policies. If you cancel within 15 days of receiving the policy document, you get a refund of premium paid minus proportionate risk charges. Beyond the free-look period, surrendering a ULIP or endowment plan typically involves significant surrender charges in the first 5 years.

How do I calculate if an insurance product’s returns are fair?
Ask for the benefit illustration document. Take the total premiums you would pay, the maturity value at 8% projected fund growth, and calculate the IRR using an online calculator. If the IRR is below 8% over 10 or more years, the product is unlikely to be competitive with a pure term plan plus equity mutual fund combination.

Is it safe to invest through a bank’s relationship manager?
Banks are regulated distributors and must follow SEBI and IRDAI guidelines. However, relationship managers have sales targets and earn product-specific incentives. Their recommendations are not independent advice. Always ask to see the commission disclosure before investing.

What should I do if I suspect mis-selling?
Document everything: original policy documents, written communication, notes of verbal claims. Approach the insurance company’s grievance cell first. If unresolved within 30 days, escalate to IRDAI’s Bima Bharosa portal (for insurance) or SEBI SCORES (for mutual funds). The Insurance Ombudsman handles disputes up to Rs. 30 lakh.

One question for you: If you reviewed every financial product you currently hold and asked “who benefited most when this was sold to me?”, what would you find?