At a recent insurance conference in Mumbai, the Irda chief J Hari Narayan said, "We are examining it because my concern is that the highest NAV guaranteed product may lead to miscommunication. We want to understand the entire issue before taking a call."
A lack of clarity on this category of products is the sticky point. As uncertainty surrounds the fate of these products, it is worthwhile to spend some time to understand how they work in their current form.
FLAWED COMMUNICATION?
Most leading life insurers offer at least one NAV-guaranteed Ulip as part of their product suite. And much of the concern stems from the products guaranteeing the highest NAV. According to critics, some people looking to buy these products may get the impression that the returns would mimic the stock market when it is at its peak and suffer minimal damage even if the indices nosedive. In other words, many individuals could assume that they can make the most of an equity boom, with the downside remaining capped in adverse situations. "They could be seen as pure equity products, but they come with a strong debt component. They are not exactly aligned with stock market movements. They may capture a larger percentage of the upside when markets are consistently moving upwards in a secular manner, but when they turn volatile, these products could start replicating fixed income performance," says Raghvendra Nath, managing director, Ladderup Wealth Management.
TYPES OF GUARANTEES
The NAV can be guaranteed in two ways. The most common is calculating the fund value at maturity on the basis of the highest NAV registered by the fund during the tenure specified by the life insurers. Or, they could carry a pre-defined NAV of a fixed amount, say, . 20. In both cases, the investment mix could be skewed towards debt products that are chosen by keeping the product's maturity in mind. For instance, in case of 10-year prefixed NAV guaranteed Ulips, a major chunk of the premium will be directed to a G-sec or corporate bond maturing after 10 years. The highest NAV product could see the premiums being invested in equities initially and the composition leaning towards fixed income instruments as the maturity date approaches.
The thing to remember is that such products have to rely on debt to ensure that they deliver on the returns that are promised. Also, a lot depends on the market view and skills of the fund manager and the actuary, who monitor the asset allocation on a daily basis and take calls on switching in and out of equities and fixed income products depending on the prevailing market situation.
KNOW THE NITTY-GRITTY
You need to be aware of certain intricacies regarding asset allocation in such Ulips. First of all, the guarantee is applicable only if you remain invested in the policy throughout its term. Most guaranteed Ulips carry a fixed tenure of 10 years and limited premium payment term of 5-7 years. In the event of the insured's death, the fund value or the sum assured, whichever is higher, is handed over to the nominees. Unlike regular Ulips, these products do not offer multiple fund choices — from only equity to only debt — and, by extension, an option to switch between them. The products, instead, are linked to the capital- or returnguarantee fund that the company offers for such Ulips. Moreover, you will have to shell out a fee in return for securing the guarantee, which could be in the region of 0.25-0.75%. Remember, this does not fall within the ceiling on charges Irda had imposed on Ulips in September 2010.
LIMITATIONS IN CURRENT FORM
NAV-guaranteed Ulips will attract the regular Ulip charges, too, which financial planners believe continue to remain above reasonable levels despite Irda's actions. More importantly, the complex nature of the products leaves them vulnerable to misinterpretation – by the sellers as well as buyers, unintentionally or otherwise. Those who go for these products assuming that they will get the best of equity markets – when they are on a roll – and yet can stay protected when the markets start tumbling, could be in for a disappointment. "Many think they can fetch fabulous returns, which may be a little difficult. What is assured is the highest NAV attained by the fund and not the highest index level," says Raghvendra Nath.
This is a complex product and, hence, difficult for investors to comprehend that in one or two situations, it can provide sub-optimal returns. It also does not provide flexibility on debt-equity allocation to the investor.
MERITS OF GUARANTEED ULIPS
But, the fact is that these products have become popular in a short span of time, which can be attributed to the lure of 'assured' returns and, of course, due to hard-selling by distributors. They appeal to those who are risk-averse and yet do not want to ignore the value of equity in wealth creation.
We had launched a guaranteed fund to provide options to individuals who may be keen on equity participation, but at the same time, wish to protect their corpus during swinging market fortunes," says Rituraj Bhattacharya, head, product development, Bajaj Allianz Life Insurance, which discontinued this fund option on March 31 after its tenure expired. They provide balanced fund-like returns since most capital-protection methodologies require a combination of debt and equity. This could be better than pure debt options. In short, while guaranteed Ulips have their share of pros and cons like other products, it is best to evaluate them in terms of their suitability. Before buying NAV guaranteed Ulips or any other financial instrument, ascertain how well they fit into your risk profile and also whether they can help you fulfil your long-term goals. Finally, factor in the element of uncertainty surrounding them today, given the concerns expressed by the Irda publicly.
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