Highest NAV ULIPs: Should you invest?

THERE is a frenzy in the market today regarding a category of ULIPs or insurance schemes called ‘Highest NAV Guaranteed’ product. This has a nice ring about it, but does it make sense to go in for it?

What the investor thinks?
It gives the impression that one will participate in the equity market growth. That of course is not the case. What a company guarantees is the highest value of it’s own NAV. For guaranteeing the NAV they will have to invest in debt products whose maturity value is equal to the guaranteed value.

How these kind of products work ?
These products use Constant Proportion Portfolio Insurance concept. Here, the portfolio is managed and allocated dynamically between debt and equity in a way that the highest NAV attained is locked by moving a portion of equity assets to debt, whose maturity value will be equal to highest NAV attained till then. Over a period of time, equity assets are bound to move to debt. The reverse however may not be possible as when equity markets fall, it may not be possible to move debt funds to equity as they may be locked in to assure highest NAV.

So, what is good about the product?
In one word – Charges! Let us take the case of LIC Wealth Plus. For a regular premium payment between Rs 20,000 to Rs.2 Lakhs, the Premium Allocation charges is 12.5%, in the first year and 2.5%pa thereafter. Policy Administration Charges is Rs.60/-pm in the first year, Rs 25 pm from the second year onwards, escalating at 3% pa. Fund Management Charge is 1%pa and 0.35% pa is the Guarantee charge. The charges in most products will be on similar lines. This does not look that cheap for a fund that will eventually be a debt fund in the later years.

— There is nothing stopping the fund manager from having a substantial debt component even in the earlier years, as the mandate in such products is that they can hold 0- 100% in Debt or equities.

— Those thinking that they will participate in the upsides of the Equity market will be disappointed as this category of product assures highest NAV of the fund itself.

— This then turns out to be a product that has a fairly long maturity – at least 3 years or more. For a return that is expected to be somewhat higher than a debt product, locking in for long periods makes no sense.

— Guarantee of highest NAV is applicable only at maturity, not otherwise. This clause immediately makes the product less attractive as it is a long duration product. Any withdrawals in between for any exigencies, beats the whole purpose of investing in such a product.

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