Should you invest in Highest NAV Guarantee ULIPs?

by Amandeep Singh

in ULIPs

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.

highest nav Should you invest in Highest NAV Guarantee ULIPs?<Image Credit>

Also Read: How to get over the fear of Investing?

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.

Also Read: Tips to Make your Money Work Harder For You

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.

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{ 18 comments… read them below or add one }

Arjun April 19, 2010 at 1:13 pm

Really Knowledgeable Article

Please clarify the “”Return ON Investments but Return OF Investments”

Reply

Amandeep Singh April 21, 2010 at 12:20 am

By this statement I mean that in volatile time like we saw in the recent past, if for example, you invested Rs.50k in the market when the markets were scaling new highs, then during the downfall, you will not worry about the 10-15% that you were earning on the 50k you put in, but your concern would be to get your principle back… :)

So, the Return On investment is no longer a concern, the return of investment itself became a bigger concern :)

And Thanks a lot for the emcouraging words, Arjun

Reply

Arjun April 21, 2010 at 5:43 am

Thanks

Reply

Vishal April 21, 2010 at 2:24 pm

This is a great article. I agree that highest NAV products are likely to have more downsides than upsides. Its also a bit confusing for the investors as it gives them an impression of equity growth participation when it is essentially a high cost debt instrument with limited equity participation. The highest NAV will probably not even be as high as a good debt fund (given the higher charges). I wonder why such products have become so popular though…. Are we missing something here?

Reply

Amandeep Singh April 29, 2010 at 11:33 pm

“it gives them an impression of equity growth participation when it is essentially a high cost debt instrument with limited equity participation”

The answer is in your question only Vishal, when I heard of these highest NAV Return products, these sounded to me that this would be the most beneficial investment instrument introduced. But that also made me wonder that there has to be some catch ;)

I tried searching how these products work and came to know much about them. A simple tagline, This ABC product gives you the return based on the highest NAV in the last 7 years of your investment easily catches the eyes of investors.

Reply

Nitin April 29, 2010 at 10:58 am

Hi,
I saw ur discussion which is really helpful.

I dont have much knowledge about the market and I want to invest 50,000 per year for 20 years, now i have 2 options. First is to invest the whole amount in the ULIPs and the Second one to have the LIC Jeevan Saral policy. So can you please answer of some of my questions below :

1) Is it safe to invest RS 10,000,00 for 20 years in ULIPs and if yes then at what % i could get the return and after 20 years what ‘exact’ amount i may got ?
2) Is this idea good to go for the investing RS 10,000,00 for LIC Jeevan Saral policy and if yes then after 20 years what ‘exact’ amount i may got and on what %. Does the total cash return depends on the market??
3) For which option should i go, for LIC Jeevan Saral policy or for ULIPs.

Waiting for your answers.

Thanks & Regards…
Nitin Verma
9990967637

Reply

Ruchi December 23, 2010 at 4:33 pm

Dear Sir,
We read your query and would like to know
if currently you look forward to invest in ULIPs.
What amount are you looking to invest and your age?

We should provide you with best plans available.
Regds
Ruchi Kedia

Reply

Ajay December 24, 2010 at 6:17 am

Dear Amandeep,
I think, we all are here to share financial awareness, not to pitch any product.

Kindly avoid such people.

http://www.jagoinvestor.com/2010/12/term-insurance-plans-comparisions-india.html

http://jagrukinvestor.com/blog/?p=468

http://www.tflindia.in/2010/12/psychology-indian-life-insurance.html

Recently i read some good article.

Reply

Amandeep Singh December 24, 2010 at 6:36 am

Hello Ajay,

Thanks a lot for your valuable feedback :)

My belief is also exactly the same as yours; the sole reason behind starting Equitipz…

The reason behind approving such comment is that ET is a community and if through this medium, people like Ruchi can help our readers, it adds to our vision of spreading Financial literacy in India.

But, I completely get you point and the promotional looking comment has been modified. Keep providing your much useful feedback; it adds to our goal :)

Reply

Sunny Talreja April 30, 2010 at 12:23 pm

Hi Amandeep,
Your blog was indeed very informative. But you also made a crime of calling ULIP as investment whereas it is a mere endowment based insurance policy. Company agents keep calling it as an investment instrument to deceive innocent investors whose primary concern is returns and not the insurance.
Whats your idea of starting a movement to de-link the word investment from ULIPs :)

Reply

Amandeep Singh April 30, 2010 at 9:51 pm

Sunny, thanks a lot for sharing your valuable comments.

I totally agree with you on the take that you have on the ULIPs… But facing the reality, agents have been using this suffix “for investment” when they pitch for any product for that matter.

Mediums like MoneyVidya and Equitipz have to spread awareness among the masses to be careful while investing as in most of the cases, people invest without knowing much about what they are investing in…

And, for that cause, I love your idea of starting the movement which separates the difference :)

Reply

Arjun April 30, 2010 at 3:47 pm

Hi Nitin,

First of all if you are planning for next twenty years, both LIC Jeevan Saral & ULIP are irrelevant product.

I will suggest, first you should calculate your life risk (25 Time of Annual Income) and then go for a Pure Term Plan.

Example:
Annual Income – Rs. 16/-
Risk Cover – Rs. 400/-

And always remember few things at the time buying Term Plan…………

1.Don’t take a single policy for twenty years.
2.Don’t hide any disease or other out side insurance policy details from Insurance Company, bcoz these issues may arise at the time of claim settlement (if any mis-happening occur)

Always buy term plan in four or five break ups.

One policy for 5 yrs of Rs.400 risk
Second for 10 yrs of Rs.300 risk
Third one for 15 yrs of Rs.200 risk
And fourth for 20 yrs of Rs. risk

Reason being as time passed you meet out your goals and your liabilities decrease.

Benefits….
It will reduce your premium amount.

Investment
If time horizon is for 20 years, definitely you should go for equity (Mutual Fund & Shares)

Start SIPs in time tested equity diversified mutual funds for next twenty years.
1.HDFC Equity Fund
2.Reliance Growth Fund
3.Franklin India Bluechip Fund
4.SBI Magnum Contra Fund
5.HDFC Prudence Fund

And put a fix amount monthly in bluechip shares (Like Infosys | Reliance | TATA etc.)

Equity is wealth creator tool in long run…

In LIC Jeevan Saral you can expect maximum return 6 to 6.5%

In ULIP your first year premium will be just cost of Policy which will hurt compounding impact in longer run and this is not end of charges in ULIP. There is lot type of charges in ULIP products.

Administration Charges
Mortality Charges
Premium Allocation Charges
For Guaranteed ULIPs, Guarantee Charges

Reply

Amandeep Singh April 30, 2010 at 9:58 pm

Arjun, Thanks a lot for replying to Nitin’s Query…

To add to your version, I think that if a person has a long term view like in Nitin’s case, 20 years, one should also have a LIC policy in addition to the instruments that you have mentioned. By the end of 20 years, one gets not big returns, but a lumpsome amount and that too risk free…

And your view about the equity investment, I always say that when you think equity, think long term and you will never lose… :) Also, any amount that you can spare for 4-5 years, put it in equity… if you look at the past numbers, the probability of losing in equity decreases to almost nil over a period more than 4-5 years…

Reply

Arjun May 5, 2010 at 11:39 am

Dear Amandeep Ji
According to me basic asset class are as follows……

1. Equity / Business
2. Gold
3. Land / Real Estate
4. Commodity
5. Liquid / Debt

Rest of products available in market is just combination of above asset class.

Can we expect from your side a detailed article on basic assets class?

I read somewhere that asset class gold is like Insurance. Because it never fails, until economy of that country not fail.
Kindly clarify.

Reply

Amandeep Singh May 5, 2010 at 9:38 pm

Arjun Ji :)

I think, having a detailed article on the Asset class is a really good idea… Will surely come up with one is sometime. :) Stay tuned….

And regarding the Asset class Gold, I read a very interesting article… http://pragcap.com/reflections-on-gold-as-an-asset-class

Reply

Nitin May 2, 2010 at 3:17 pm

Hi Arjun and Amandeep,

Thanks for replying my query, u guys are really doing a very good job.

Reply

Amandeep Singh May 5, 2010 at 9:26 pm

Thanks a lot for the appreciation Nitin :)

Reply

Nana Dade November 4, 2012 at 8:35 am

I have taken bajaj allianz capital gain Ulip plan n paid 3 premiums (annual premium 50k) since last 2 years i didn’t pay premium, if i check now my policy statement(NAV) it show my fund value 158000(after 5 years). I wish to surrender my policy , but there is TIP on my statement saying`Surrender Penalty applicable as on statement date is 51.52 % of the value of the outstanding Capital units’ . what it mean, how much will i loose out of 158000 roughly? experts reply pls.

Reply

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