Tuesday, August 24, 2010

Highest NAV guarantee Insurance plans-- Fact or fiction

Today presentation or packaging plays a very important role in success or failure of a product. People are willing to pay the cost even if it exorbitantly priced. For example cost of a mineral water bottle is more than the water inside. The only reason people buy packaged water is because it is very convenient.

This concept was applicable in the investment field in general till now has now been seen playing out in the insurance arena in the form of Highest NAV Guarantee ULIP plan.

Such plans quite contrary to common belief do not guarantee highest returns but guarantee only highest NAV (as highest NAV does not necessarily mean highest return). For example if your NAV was Rs.10/- at the time of initial purchase and it’s value grows to Rs.20/- over a period of time and then falls; you will receive at least Rs.20/- on maturity. Subsequently even if the stock market goes up, your ULIP may not move in tandem.

However, there are a few important points about these types of plan which we believe should be highlighted. They are:-

  • The guarantee is valid only if you hold the policy till maturity. Premature withdrawal may prevent you from enjoying this guarantee were you to withdraw such a plan pre-maturely.
  • Guarantee is that of the highest NAV and not of the returns on the premium (net of charges) invested on your behalf. Guarantee comes into play after accounting all the charges.

Many investors have wondered how is it that a ULIP fund manager able to guarantee highest NAV and not the Mutual fund manager while both invest in equity market. The answer lies in the manner such plan works. The modus operandi adopted is quite similar to the one followed in case of the Capital protection oriented funds. The fund manager –depending upon the prevailing interest rates and the given time horizon—invests a portion of the inflows in fixed interest bearing securities. For example Rs.100 can be generated and returned back as capital to the investors by investing Rs.46.31 into fixed interest bearing secuties. It will grow to Rs.100/- after 8 years.

The fund manager draws an imaginary safety line—or laxman rekha—below which the portfolio value should not go. As soon as the NAV of the investment breaches this imaginary safety line, he would exit all equity investments and re-invests into debt securities. This amount would then grow to the desired amount at the time of maturity.

A simple advice to the investor with investment horizon as long as that of the ULIP:-

  • Avoid such guarantee plans how so ever lucrative it may sound to be.
  • Instead start an SIP in a scheme of a diversified mutual fund immediately
  • Start shifting from equity to debt as retirement draws nearer.
  • The charges that you save by not buying ULIP by investing in a diversified mutual fund will also act as another earning member of the family.

Thursday, August 12, 2010

Managing personal finance is for long term…..

The whole thing is that ke bhaiya sabse bada rupaiya!!

Money goes round the world and the world goes round the money! In spite of its importance, it is on top of our mind, managing it is not! The fact that managing money requires more skill than making it seldom dawns on us—since we always pride in ourselves thinking that we know all that we need to know about money!

Your money is as important as someone else’s money!!

It is strange but true that many a finance professionals are not able to show the same level of performance in managing own money vis-à-vis client’s money! A sales manager at a prominent MF was more comfortable investing own funds in bank FDs. Why? It is possibly easier to handle client’s money as there are no attachments or far less compared to that in case of own funds.

Get professional help!!

Sure you do and we are glad about it!! There several terabytes of information available on the internet for you to access and utilize. There are websites that offer free analysis of MF schemes. But it is not the only input you need to home in to an investible fund/scheme.

Do the so called free on line fund analysis work out your risk profile before throwing up a scheme onto the screen? How do you decide the right asset allocation or allocation between say large caps/mid cap/small cap oriented funds? Sure you can download the best performing schemes---but who’ll tell you that it is the history that you are looking at….and history may not be repeated always—howsoever we may want it. Fee based advise is far better than free advice--let us all accept it for our own and our money's good.

You may not always get No.1 fund

If you have invested in 5 schemes, then one of the schemes has to be placed at No. 5. All the schemes you have invested in will not be at No.1. This wish to invest in No.1 scheme may lead you to divest a potentially good scheme. Do not fall for neighbour’s envy owner’s pride.

Let us engrave the statement “Managing personal finances is for long term”. You will have a peaceful night’s sleep once you start believing in it. Your long term financial goals will be met if you let your money work for itself with minimal of interference from you.