Highest NAV Guaranteed ULIPs – The untold story

Now remember guarantees and stock markets don’t mix. The returns from the equity markets are not guaranteed. So in order to give you guaranteed returns these plans tend to shift their portfolio between debt and equity in such a way that that the plan’s highest NAV is locked by shifting a part of equity assets to debt. This debt portion is selected in such a way that its maturity value equals highest NAV reached.

Nowadays market is flooded with Highest NAV Guaranteed ULIPs like LIC Wealth Plus and Reliance Life Highest NAV Guaranteed Plan. These plans  give many people the wrong impression that they will get the highest returns from the stock markets. But is it true? Should you opt for it? Let us take a brief look at these plans and see if they are right for you.

Actual meaning of Highest NAV Guaranteed: If you think that you are earning the highest returns from the stock markets, then think again. It is not the highest returns from the stock markets that you get, but the highest NAV of the plan that the company assures you. E.g. if the highest NAV of the fund is Rs 20, that is what you stand to gain. However the returns from the stock markets could be far higher than that.

How do they work?: Now remember guarantees and stock markets don’t mix. The returns from the equity markets are not guaranteed. So in order to give you guaranteed returns these plans tend to shift their portfolio between debt and equity in such a way that that the plan’s highest NAV is locked by shifting a part of equity assets to debt. This debt portion is selected in such a way that its maturity value equals highest NAV reached.

E.g. if the highest NAV of the plan is Rs 15, the company will shift the asset allocation from equity to debt whose value at the end of maturity is Rs 15. This means you will gain Rs. 15, even if the highest NAV at the time of withdrawal is Rs. 12.

As the plan moves closer to maturity, a majority of the portfolio will be invested in debt, to ensure you get highest NAV.

Pros and cons of the products: The main benefit is you get capital guarantee right from the day 1. Also it is suitable for risk adverse investors who don’t want to expose their capital to undue risk. This is because as the product is primarily debt-based, it will protect their capital.

However this product does have its drawbacks. The main drawback of this plan is the charges. E.g. in Reliance Life Highest Guaranteed NAV plan, you are paying 20% towards premium allocation charge for the 1^st year, which subsequently reduces to 3% for 2^ndand 3^rd year, 2% for 4^th and 5^th year and 1% from 6^th year till end of the term. The policy administration charge is Rs 40 per month and fund management charge is 1.35% pa. But the biggest charge is 0.15% for guaranteeing the highest NAV. All these charges are quite high for mainly a debt-based product.

Moreover the fund manager can decide to allocate a major chunk of his portfolio towards debt right at the start of the plan. Also you don’t get the highest returns from the stock markets but rather the highest ULIP NAV reached by the fund. Besides the returns from these funds lie between 9-10%, slightly higher than the 100% debt funds.

Now if you decide to surrender the policy after 3 years or you die within a couple of years of starting the policy, you don’t get the highest NAV but the current value of your investment. So this product is meant for long-term investors only.

Should you opt for it: Avoid at all costs. Remember SEBI does not permit mutual funds and other stock market participants to guarantee the returns. So when any company offers you guaranteed returns, they are violating the SEBI guidelines. Also you don’t get to benefit from the primary benefit of market movements: buying more when the markets go down and less when the market goes up. 

This in turn will affect your returns. Moreover paying high charges for modest returns doesn’t make any sound investment sense. Don’t forget life is uncertain. You may die, you may lose your job or some unexpected expenses may crop up, due to which you will never be able to pay the premium. In this case you lose all the benefits of this plan. Lastly, remember all these companies exist mainly in the market to make money and are not to protect your money. So be careful.

[Source: http://blog.bankbazaar.com/highest-nav-guaranteed-ulips-the-untold-story/]