Wednesday, 14 September, 2011

Highest NAV Guaranteed Products

Highest NAV Guaranteed Products

Is it for you??

Highest Net Asset Value (NAV) in a unit-linked insurance plan (ULIP) give us an idea of getting the best side of both worlds ie highest possible return with zero risk. Is it possible? Lets see what it is all about..

As we all know that nothing comes for free, our study of all the products that are guaranteeing NAVs gives us the following understanding. The quick conclusion: your returns will be between 3% to 15% in the long term looking into the product selected, term of payment and time of paying the premium.


Essentially, these are capital guarantee products that ensure that the amount you invest does not lose value and you get some upside of equity. It is erroneous to think that you get Sensex-linked return, with zero risk. These funds can’t guarantee the pure return of an equity fund.

Let’s understand how these funds work. Most of them use an investing strategy called dynamic hedging or constant proportion portfolio insurance (CPPI). Under this, the fund manager will constantly reallocate money between debt and equity classes to assure the previous highest NAV.

There are some product who invest in debt instruments only.

The result of these strategy will see different result in different market conditions like it will only give better result in up going market and in dip or volatile market it performance is not seen healthy. Many articles have been reflected in media on these whose link are below for reference

We fear, looking into the future market condition that over a period of time, the portfolio in equity may become smaller and smaller and would move towards a pure debt fund.

Mis Concept

Highest NAV Guaranteed does not mean Highest Return

What Fund Managers has to say

Says Shashi Krishnan, chief investment officer, Bajaj Allianz Life Insurance Co. Ltd: “Depending on how much the markets fall, and at what point during the tenure, we reserve the right to exit the stock market and keep all the money in debt.” Given the “go-anywhere” mandate—or 0-100% allocation in equity, debt and money market instruments—that the policy document allows, these funds can technically move fully into debt and stay there, making your Sensex-linked dream just that. A dream.

Says Manish Kumar, head (investments), ICICI Prudential Life Insurance Co. Ltd: “Since these have exposure to both equity and debt asset classes, under normal circumstances, the returns can be somewhere between what a debt fund and an equity fund would give.” In the long term, that’s between 6% and 15%.

Should you buy?

If insurance is what you want and on it you don’t want to risk the principal amount & some small returns.

Due to lack of transparency on asset allocation and the insurer doesn’t guarantee that he would stay invested entirely in the stock market during the term. So, its hard to know what high is guaranteed.

If you are looking for a Sensex-linked return kicker with zero risk, please get real. Such products do not exist.

Article in Media




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