Monday, February 22, 2010

Truth behind "NAV guaranteed" policies

There are a host of "NAV guaranteed" policies (ULIP/ ULPP) these days. It comes in different names and variations and easily one of the hottest in sales kits of insurance agents. Here is good hard look at such policies.

"NAV guaranteed" policies sound really good - its like if i buy the units for say Rs.10 and my investment is Rs.100,000, irrespective of how the NAV changes over my term, say 10 years, i get the maximum NAV as guaranteed when the term ends. For example, if the NAV peaked at year 8 at Rs.50, and at the the end of 10 years the NAV is only Rs.30, i still get Rs.500,000 as returns (50*10,000 units). The maximum NAV is Rs.50 is locked!

But can that be true? The answer is yes. But (and that's a BIG but), unlike equity oriented funds, NAV guaranteed products invest highly in debt oriented funds. To over simply things, we can even assume that they  park the money safely in fixed deposits for the term. So the reality is that such funds will grow at a very conservative pace (and of course rarely go down) and can be considered more or less on par with traditional insurance products like endowment and money back plans.

These plans are targeted specifically at investors who want to invest in unit linked products, but are skeptical of market volatility. But most will miss the point in the investment rationale. Remember the old saying while you hear about such plans - "low risk implies low returns". If you don't want to take risks, only then opt for such plans. Here again make sure that you understand where your money is going to get deployed and how the fund has performed till date.

Investor beware!

Disclaimer: The views posted in this blog are my own and are based purely on my own way of assessments. Readers are  requested to consult with their financial/ insurance advisers before making any investment/ insurance decision, do their own due diligence and validate factual information. 


Ajay Gupta said...

Hi, nice article. I was thinking that they will have high hidden costs so that they can give returns on the highest NAV.
As you have pointed, if the funds are kept in FDs, the returns(CAGR) would be very less and would fail to attract new investors.

Ganesh said...

Thanks for stopping by and putting in your comments.

They market it so well that even the most suspicious will be tricked if not extra cautious!! :-)