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com 2011

Never to Invest in Highest NAV Guarantee Plans why?

Now a days, we are seeing a new “Innovative” product in the market. They’re called Highest
NAV Guaranteed Plans .These products have come in, after the recent crash in the market, and
companies are taking advantage of the fact that Investors are looking for some kind of a safe
investment equity product. Hence, they’ve launched these Highest NAV Return ULIP’s which
confuse investors and make them (the investors ), believe that they are going to get the highest
return from the Stock market in long run – generally the tenure is 7 yrs, for these plans .

In this article, we look at how Highest NAV Guarantee ULIP’s work, and you will understand,
how any Guarantee product can be created by simple methods . The simple catch, here is that
these schemes, are structured in such a manner, that the collected funds can be invested either
in equities, debt instruments or in money-market instruments in proportions varying from zero
to 100%

How Highest NAV Guarantee Policy Works ?

These plans use strategies like Dynamic Hedging and CPPI (Constant proportion portfolio
insurance), which are advanced strategies used in Derivatives world. But, let me explain a
simplified version of the whole process.

Supposing a policy starts today and is guaranteed to give highest NAV in next 7 yrs and we can
control how money moves to debt and equity, its pretty simple.

In the beginning, let’s assume a NAV of Rs 10, and the Asset allocation is 100% in equity and 0%
in debt . Now suppose, the market moves up and NAV goes upto Rs 15 by the end of the first
year, at this point, try to understand what Insurance company has to provide – they have to
make sure, that they provide at least Rs 15 as the return after 6 yrs . Now in order to achieve
this, all they have to do is keep X amount in debt instruments which will mature in next 6 years
and provide Rs 15 at the end of 6 yrs, so assuming the debt return at 7%, they need to put
around Rs 10 in Bonds , so that the maturity of the bond is Rs 15 at the end of 6 yrs .

=> 10 * (1.07)^6
=> 15.007

They can now invest the rest Rs 5 in Equity as Rs 10 is allocated to Debt . So, now they’ve made
sure that whatever happens to the market, they get Rs 15 for sure at the end of 6 yrs. Now,
there are two possibilities

Case 1 : Market Goes down : If market goes down, the NAV will go down correspondingly, but
as per the strategy, the maturity value will be at least Rs 15.
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Case 2 : Market Goes up again : If market goes up at this point and the NAV rises above 15, for
example say to Rs. 18, now again they will pull out money from Equity and allocate such an
amount to debt, that the maturity at the end of total 7 yrs would be Rs 18 and so on…

Note :

• These highest guaranteed schemes do not provide wide range of product categories,
such as equity-oriented growth funds, balance funds and debt funds.
• 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. This is inferior to even a
regular debt product because of the high cost structure involved.

Following is a pictorial description of how the Guaranteed NAV plan works with assumption of a
7 year tenure.

How Investors get Confused

You have to read in between the lines; Investors need to understand that these schemes
guarantee the “Highest NAV”, READ AGAIN! , it’s Highest NAV and not “Highest Returns” .
Normal Investors don’t give much thought before buying these products and normally assume
that the returns will be linked to the Equity Markets .

Returns from Highest NAV Guarantee Plans

So, what are the return expectations of these funds? We know, that long-term equity returns,
are normally in the 12-15% range while, debt returns turn out to be 6-7%. So, considering the
fact, that these products will shift most of their money to debt, by the end of the tenure , we
can expect the returns to be in range of 9-10%. We do get some equity upside in these
products, but that will be limited. After a point, this product will turn into a debt oriented fund
with a major portion in debt . Also if you factor in costs, like premium allocation charges ,
fund management charges and other yearly charges, the returns will not be what you actually
expect.

You will be amazed to know, that the returns expected from these schemes, may be lower than
the returns offered by equity-oriented Ulips. The reason being, that the basic objective of
protecting the previous high NAV of the fund, may constrain the fund manager’s ability to take
risks while allocating funds. So if the market has fallen down, the fund manager can’t take the
risk of shifting the money from Debt to Equity to gain from the potential upsides in future ,
because they have to provide the “Guarantee.”
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Current Products in Market with Highest NAV Guarantee

• ICICI’s Pinnacle
• Birla Sun Life Platinum Plus-III
• Bajaj Allianz Max Gain
• SBI Life Smart Ulip
• Tata AIG Apex Invest Assure
• LIC Wealth Plus
• Reliance Highest NAV Guarantee Plan.
• AEGON Religare Wealth Protect Plan

Controlling your emotions with these products

Let’s talk about mistakes from the investors point of view. We, as investors, don’t think with
inquisitive, susceptive minds. Getting good returns from stock markets is anyways a tough thing
in itself. So when these companies come up with plans like these, which say “highest NAV in 7
yrs”, we have to ask, “How is this possible?” . Dont say it’s not possible at all, just ask how? How
do they achieve it? Stop seeing dreams of getting high returns without looking at the risk
involved, and try to find out – what is the strategy they’re using , Is there something in between
the lines ?

We all want to get great returns, but we have to shed this belief that, companies come up with
plans specially for us. All the companies out there exist to earn money, and their motive behind
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every product is to make money, & generate profits for their companies, so that they keep their
shareholders happy. So next time a product like this comes up , you have to control your
emotions before getting in and first investigate. The worst part of this whole business, (of
guaranteed highest NAV products) is the timing and how it gives naive investors, high illusions
about the product. Products like these, take major advantage of psychology of the ordinary
saver. Many Investors in smaller towns have broken their Fixed Deposits and taken some loan
to invest in products like these, especially SBI Life Smart Ulip and LIC Wealth Plus because of
the trust factor with LIC and SBI .

Why you should be “Pissed off” At these Insurance Companies

• Do you Know that, The Securities & Exchange Board of India (SEBI) , the stock market
and mutual fund regulator, does not allow mutual funds to guarantee returns. Therefore
Mutual funds can not provide guaranteed products which are related to stock markets,
but IRDA can approve things like these and all these insurance companies come under
the ambit of Insurance Regulatory and Development Authority of India (IRDA). So any
Insurance Company can come up with a new Plan , link it with market and start
providing “Guaranteed products” . You have to understand that “equity markets” and
“guarantees” are a very risky idea together , so please stay away.

• Do you observe when do all these “Innovative” products come up in Market ? The
answer is around end of the year, which is a premier Tax Investment time (Jan , Feb ,
Mar) . Is innovation in Finance space limited to End of the year ? Why dont these
products come through out the year? Why ? The answer is simple , if it comes after
anytime other than last 4-5 months of the Financial Year (ie Dec , Jan , Feb , Mar) , no
body will bother to invest in these, because no body is bothered to “invest” at all .
Companies very well understand investors psychology and their helpless ness at the end
of the year because they have to provide investment proofs for Tax exemption as soon
as possible . This is not just limited to these products , its true for NFO’s , IPO’s in
booming markets , More Sales calls at the end of the year, and other new products .

• The so-called “Guarantee” is a marketing gimmick and is implicitly a result of the way
the investment is structured . what it means is that the strategy they use itself is such
that it will provide you the highest NAV , even we can create our own Plan and do what
they are doing . But they make sure that Investors feel like they have done years of
research and came up with these amazing plans .

• Why The Tenure is 7 yrs ? I am not very sure on this ,

• You have to understand that there is nothing “Innovative” in this product , the fact that
7 companies have come up with the same product proves that its not “innovation”
because Innovation is unique . Aegon Religare has gone ahead in this stupidity and
introduced their Guaranteed Plan which guaranteed 80% of the Highest NAV , Looks like
they think that it makes them look different from others .
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Who should Invest in These Products ?

If you are looking for modest returns, like 8-10%, you can invest in these policies. The return of
these policies may be high in the beginning, if market does well; but when market starts
performing badly, the returns can take a hit and then be in a tight range. Your NAV will be
protected for sure, but the returns wont be, since over time the CAGR return will go down.
Remember, if your NAV is 10 today and you highest NAV is 20, for a 2 year period, the return is
a good enough 41%, but by the 4th year it’s just 18.9% and by the end of 7th year it’s a measly
10.4%. So what you really need, is protection of returns, not the NAV which is just a fixed
number.

http://www.scribd.com/doc/43310883/LIC-Wrong-Selling-by-Agents

http://www.scribd.com/doc/48423864/Again-New-Stunt-From-From-LIC-Bima-Account-New

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www.kgandhi.anindia.com

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