Skip to main content

What to Expect From Guaranteed-NAV ULIPs?

The idea of guaranteed returns can be tempting. Here's all you wanted to know about them


   Guarantee is a very appealing word. Particularly, for Indian investors. How else would you explain the hold of fixed deposits and endowment plans over them? As long as their investment delivers the returns promised, they don't mind losing out on the possibility of earning higher returns. To tap investors with this mindset, especially in the backdrop of a volatile equity market, some life insurers have launched guaranteed-NAV (net asset value) Ulips in recent months. Since the past two months, the markets have been fairly uncertain. Also, interest rates are high at the moment. Hence, such products are being launched. While these products could work for some, it's best to understand their intricacies to determine their suitability instead of simply going by their nomenclature.

TYPES OF GUARANTEED ULIPS

Guaranteed-NAV products essentially belong to two categories – one that comes with a pre-specified NAV assurance and the other where the highest NAV achieved by the fund during the initial 7 or 10 years is used to calculate the fund value at maturity. In the case of the former, the NAV is pre-fixed at say . 15 or . 20. Investments are primarily directed towards fixed-income securities whose tenure is aligned with the policy's maturity. If the policy is set to mature after 10 years, the premiums will be in-vested in a 10-year G-sec or a 10-year corporate bond. In the case of highest NAV guaranteed Ulips, you start with a NAV of . 10 with no guarantee at the outset. Initially, almost 100% of the premium amount is invested in equities. As the maturity date draws closer, this allocation can change and the composition will be a mix of debt and equity. If there is a downturn, then the debt component will be increased in a proportion required to ensure the guarantee.

THE MECHANISM

These products offer the highest NAV recorded over a given period. The premium is payable for a fixed period of around 5 years. In the NAV build-up phase, the reset dates set by the companies are exercised. Reset dates are pre-decided dates fixed by insurance companies to record NAVs. Then comes the accumulation phase, which refers to the tenure remaining after all the reset dates have been exercised. On maturity, you are entitled to the highest of the fund value at maturity or the fund value as calculated using the highest recorded NAV during the pre-defined period. The highest NAV registered by the fund during the first seven years is taken into account while calculating the redemption proceeds. Offering and meeting the guarantee promise necessitates monitoring the fund composition on a daily basis. If the fund manager and the actuary see the stock market faltering, some portion will be reallocated to fixed instruments. Once they see signs of market recovery, they could get back into equity. In case of the insured's death, the fund value or the sum assured, whichever is higher, is given to the dependent.


Regular Ulips offer several fund options, ranging from pure equity to only debt, and the policyholder is allowed to choose between these funds. However, with guaranteed-NAV Ulips, this is not possible. Here, you will have to settle for the capital or return guarantee fund that the company offers for such Ulips. Insurance companies invest the premium based on the number of years the product is offered for. For instance, assume . 100 is invested for five years and the sum is divided in a 70:30 proportion. Now, 70% is invested in bonds. Let's assume these bonds give a return of 9% p.a i.e. 6.30. So, in five years, the total return will be . 31.50. When we add the initial . 70 to this, we re-cover the sum of . 100. Thus, the capital is guaranteed and the balance amount too will yield some return over and above this sum.

THE INDUSTRY PERSPECTIVE

They are projected as products that offer the chance to participate in the growth from equities, while containing the possible losses by investing in fixed income avenues. Individuals too can manage their portfolios on their own, but at their own risk. If the equity market tanks, you can hope that it will recover, but there is no guarantee. Here, you have a fund manager and an actuary managing this risk on a daily basis. Those who want higher returns through equities, but not at the cost of the volatility of the market can look at these products.

THE LIMITING FACTORS

The key one is perhaps common to all Ulips – despite the cap on Ulip charges introduced in September 2010, financial planners continue to believe that the cost has still not come down to reasonable levels. This apart, there are certain other limitations too. For one, the guarantee is applicable only at maturity. That is, if you decide to withdraw the money prematurely, the minimum assured return will not be offered to you. This apart, a guaranteed-return Ulip does not offer too many fund options. Those who wish to have a wider choice can look at regular Ulips. Then, due to the guarantee factor, most such products will tend to be heavily invested in debt, which limits the fund's ability to earn higher returns.


Also, the highest-recorded-NAV is linked to the fund's own performance and not the stock market. Therefore, if the market has done well, you cannot assume that it will reflect in your fund's returns. Rather, its performance will largely depend on the fund manager's skills and efficiency. And to offer this expertise, the insurance company will levy an additional guaranteeing charge. Remember, this is not subject to the Ulip charges ceiling imposed by the Irda. Also, the structure of these products is quite complex.

ASCERTAIN THEIR SUITABILITY

Finally, any investment proposal, even if it seems fail-safe, should be evaluated in the context of your needs and of course, risk appetite. It is a Ulip product, so if you need insurance, you can consider it; if not, then you shouldn't look at a Ulip. Clients will opt for the guarantee products if they are not comfortable taking a risk. They will suit risk-averse policyholders who do not mind foregoing the return which a non-guaranteed Ulip or an equity mutual fund could yield.

 

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l

IDFC Premier Equity Fund dividend

  IDFC Mutual Fund   has announced dividend under the dividend option of   IDFC Premier Equity Fund Direct-D . The quantum of dividend shall be   R 4.3464 per unit.   The record date has been fixed as May 06, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot]
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now