Returns on NAV-guaranteed plans are higher than debt products

Last week, Pankaj Ramnath got a call from an insurance executive offering him a highest net asset value (NAV)guaranteed unit-linked insurance plan (Ulip). Given the volatility in the equity markets, Ramnath felt a guaranteed plan was the perfect investment option.

Ramnath had various options to choose from. Birla Sun Life Insurance has launched Platinum Advantage Plan; ICICI Prudential has Pinnacle II; HDFC Standard Life Insurance has Crest, and the latest offering is from ING Life Insurance - Market Shield. Investors expect to get returns based on the highest NAV in these funds. Suppose the NAV in the first, second and third year is 20, 30 and 40, respectively, the company will offer returns at 40 per cent even if the equity markets undergo a correction thereafter.

Ramnath's financial advisor, however, ruled against his investing in the product. Reason: the returns from such products are slightly higher than debt products or at best comparable to balanced funds. "Guaranteed return products are for investors who have a conservative approach and do not mind sacrificing the upside in lieu of downside protection," says Rahul Aggarwal, CEO, Optima Insurance.

Like Ramnath, many investors think that in NAV-guaranteed funds, the insurance company will invest money just like any other Ulip (say 100 per cent in equities) and give back returns based on the highest NAV it achieves during the policy tenure. In reality, NAV-guaranteed plans are not pure equity products such as other Ulips, which use different funds for wealth creation. To give the returns based on the highest NAV, these funds use an investing strategy where the majority of investments are in debt, and a minority portion in equity. According to Abhishek Singh, head research, apnapaisa.com, "Fund managers of such plans have a free mandate and can move the entire portion of the fund to debt In the last six months, Tata AIG's nies levy an additional charge for providing the guarantee. This annual charge can vary between 0.1 per cent and 0.5 per cent (ING Market Shield) each year.

Except for ING's Market Shield, way, he/she would get the prevailing returns based on the prevailing NAV. Most insurance companies had this product even before the Insurance Regulatory and Development Authority, or Irda, changed the structure and charges on all Ulips. In many of the earlier products, if the policyholder passed away, the nominee would get either the fund value or the sum assured depending on which of the two was higher. This feature exists in the new products, as well. Out of the products mentioned earlier, only ICICI Pru Pinnacle II provides sum assured and fund value, if the policyholder passes away.

The structure of this product category allows the fund to protect the capital, while capturing the small upside in the equity market. Someone looking for market-linked returns can look at the regular Ulip policy.

At A Glance

* Majority investments made in debt instruments, restricting returns

* Suitable for conservative investors, uncomfortable with volatility of equity markets

* An additional charge of 0.1-0.5% levied for guaranteed returns

* Mostly returns given based on highest NAV only if the person stays until maturity

* In most plans, nominee receives either sum assured or fund value, in case of policyholder's death

Source: http://epaper.business-standard.com/