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.