Nowadays, everyone wants to be rich in the least possible time and for that they are ready to surrender to anything that comes their way. The Insurance companies and the AMCs, taking full advantage of the situation, keep coming up with new product/schemes which are targetted to capture the interest of such investors. Some products are such that the entire investor community is pulled towards the very launch of such schemes. Similar is the story for the newly launched “Highest NAV Guaranteed” ULIPs.
There is a wild excitement spreading in the market today about this newly launched category of ULIPs or insurance schemes by the companies which are attracting the investors because of the name of the product which guarantees a return as per the highest NAV of the product. This sounds good to me as well but in this article we will discuss that does it make sense to go in for it?
What is the mis-conception about Highest NAV?
It gives the impression to the investors that one will participate in the equity market growth. That, of course, is not the case. For these products, what a company guarantees is the highest value of it’s own NAV. To guarantee such NAV, they will have to invest in debt products whose maturity value is equal to the guaranteed value.
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How do these kind of products work ?
The Highst NAV guarantee products use the Constant Proportion Portfolio Insurance concept. In this concept, the portfolio is managed and allocated dynamically between debt and equity in such a way that the highest NAV attained is locked by moving a portion of equity assets to debt, whose maturity value will be equal to highest NAV attained till then.
To know more about this concept, you may read more about CPPI on Wikipedia.
Over a period of time, equity assets are bound to move to debt. The reverse, however, may not be possible as when equity markets fall, it may not be possible to move debt funds to equity as they may be locked in to assure highest NAV.
What is the advantage of these products?
1. It offers capital guarantee from day one. In the volatile conditions of the market that we saw in the past, the worry of the Investors was not the “Return ON Investments but Return OF Investments”. So, with such products, you are assured that you will get your principal back.
2. You are in advance, assured of whatever growth happens in your portfolio, in terms of NAV. For risk averse investors, it is a major source of comfort as they know that their principal is safe and any growth in NAV is locked in.
3. One is taking advantage of equity exposure in the beginning and over the time it is shifting to debt which is in line with the requirements, to an extent. But here the change will be much faster to debt.
4. It can be treated as a debt oriented product which will give some returns with an equity kicker in the earlier years. It is like a hybrid product like MIP, with the difference that the equity portion comes down over time.
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What are the dis-advantages of Highest NAV Products?
First and foremost, a simple answer to this question is one simple word – Charges!
Let us take the case of LIC Wealth Plus. For a regular premium payment between Rs 20,000 to Rs.2 Lakhs, the Premium Allocation charges is 12.5%, in the first year and 2.5% p.a. thereafter. Policy Administration Charge is Rs.60/- per month in the first year, Rs 25 per month from the second year onwards, escalating at 3% p.a. Fund Management Charge is 1% p.a. and 0.35% p.a. is the Guarantee charge.
The charges in most products will be on similar lines. This does not look that cheap for a fund that will eventually be a debt fund in the later years.
Below are the main reasons that can keep investors away from this product:
- There is nothing stopping the fund manager from having a substantial debt component even in the earlier years, as the mandate in such products is that they can hold 0-100% in Debt or equities.
- Those thinking that they will participate in the upsides of the Equity market will be disappointed as this category of product assures highest NAV of the fund itself.
- This then turns out to be a product that has a fairly long maturity – at least 3 years or more. For a return that is expected to be somewhat higher than a debt product, locking in for long periods makes no sense.
- Guarantee of highest NAV is applicable only at maturity, not otherwise. This clause immediately makes the product less attractive as it is a long duration product. Any withdrawals in between for any exigencies, beats the whole purpose of investing in such a product.
I think that the above information about the products that guarantee “Highest NAV Return” will help you in taking both the positives and the negatives, into consideration, when you are making investments in such products. But still, we suggest that you consult your Investment Advisor before making any investment in such products.