Guaranteed Highest NAV Funds – Lifting the Veil, Kavitha Menon
You probably have seen the advertisements. Its all over the place with many insurance companies offering a guarantee on the highest NAV of their ULIP scheme. ULIP funds invest in market listed securities which can be both equity and debt related. Since these schemes are long term in nature, investors invariably choose 100% equity allocations. Such investors had taken a huge beating during the crash of 2008 and have seen significant erosion in their investment values. This volatility had put off potential as well existing investors from committing more funds into these schemes. Now “Assured Highest NAV” schemes have been projected as the ultimate solution to market risk. You are guaranteed the highest Nav during a certain period, or fund value whichever is higher at the end of term. What sold to investors is the idea that the fund will be invested completely in equities and the highest returns from such an equity portfolio will be made available to them. This is not the truth. First let us understand how these products work
1. The initial investments may be 100% equity or a combination of debt and equity depending on the strategy followed
by the fund manager
2. The fund manager follows a portfolio insurance strategy that can be done by allocating funds between debt and
equity – Here the fund manager sells equity as the market falls, so as to protect the downside. Unfortunately the 'guarantee' on highest Nav does not allow for the reverse to happen i.e. to buy equities as the market recovers. This results in sub-par returns from the Equity portfolio
3. Money removed from the Equity portfolio is invested in debt. The proportion of debt increases steadily and soon the debt part of the portfolio will become large enough to ensure the highest NAV.
So let's say over the next 10 years a 100% equity portfolio will deliver a 15% CAGR. A'highest NAV assured scheme' will deliver anything between 6 to 10% CAGR during the same period. From this further deduct costs that when spread over the duration of the scheme could range from 3 to 4% p.a. You also pay for insurance (mortality charges). So cut out that too from your returns and you will see that these are really inferior products. In fact they are inferior to even
regular ULIP products because the guarantee on highest NAV is available only if you survive the term. If you die during the term, your nominees will get the prevailing value of the fund. They are inferior to even a regular debt product because of the high cost structure.
A guaranteed NAV does not guarantee 'equity linked' returns. There is no way of knowing what the highest NAV would be and that Nav would probably have nothing to do with the stock market's highest level during the same time. The so called guarantee is a marketing gimmick and is implicitly a result of the way the investment is structured i.e. with high
proportion of debt. As an investor you are paying for such a guarantee, by accepting less than optimal returns.
Please evaluate your insurance needs and asset allocations before investing in any product. And it is best to avoid expensive investments for your long term goals. To get equity related returns invest in equities a good quality, well constructed portfolio is a better guarantee to optimal returns.
1. The initial investments may be 100% equity or a combination of debt and equity depending on the strategy followed
by the fund manager
2. The fund manager follows a portfolio insurance strategy that can be done by allocating funds between debt and
equity – Here the fund manager sells equity as the market falls, so as to protect the downside. Unfortunately the 'guarantee' on highest Nav does not allow for the reverse to happen i.e. to buy equities as the market recovers. This results in sub-par returns from the Equity portfolio
3. Money removed from the Equity portfolio is invested in debt. The proportion of debt increases steadily and soon the debt part of the portfolio will become large enough to ensure the highest NAV.
So let's say over the next 10 years a 100% equity portfolio will deliver a 15% CAGR. A'highest NAV assured scheme' will deliver anything between 6 to 10% CAGR during the same period. From this further deduct costs that when spread over the duration of the scheme could range from 3 to 4% p.a. You also pay for insurance (mortality charges). So cut out that too from your returns and you will see that these are really inferior products. In fact they are inferior to even
regular ULIP products because the guarantee on highest NAV is available only if you survive the term. If you die during the term, your nominees will get the prevailing value of the fund. They are inferior to even a regular debt product because of the high cost structure.
A guaranteed NAV does not guarantee 'equity linked' returns. There is no way of knowing what the highest NAV would be and that Nav would probably have nothing to do with the stock market's highest level during the same time. The so called guarantee is a marketing gimmick and is implicitly a result of the way the investment is structured i.e. with high
proportion of debt. As an investor you are paying for such a guarantee, by accepting less than optimal returns.
Please evaluate your insurance needs and asset allocations before investing in any product. And it is best to avoid expensive investments for your long term goals. To get equity related returns invest in equities a good quality, well constructed portfolio is a better guarantee to optimal returns.
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