You know that ‘Highest NAV Guarantee’ plans give you the guarantee of highest NAV but what you don’t know is that they don’t guarantee the highest returns. Confused? let me explain.
How ‘Highest NAV Guarantee’ works
Almost all the companies offering such plans use an dynamic hedging investment strategy called Constant Proportion Portfolio Insurance (CPPI). In this strategy, the fund manager constantly allocates funds between debt and equity to ensure that you get the previous highest NAV. Because there is a guarantee involved, higher proportion of the portfolio has to be invested in debt. In the first year your investment will be split between debt and equity to ensure that you get an assured NAV of Rs. 10. In the next year, suppose the equity markets fall, the portfolio will hold due to investments in debt. If the markets were to rise and suppose the NAV reaches Rs. 12, then the funds will be moved from equity to debt to assure NAV of Rs. 12.
Also, to get this guarantee, you need to bear an additional cost over and above the fund management charge further eating away from your return.
Plans offering ’Highest NAV Guarantee’
There is a slew of such products launched by practically all the insurance companies operating in the market. These plans are as follows:
- LIC Wealth Plus
- ICICI’s Pinnacle
- SBI Life Smart UlipAEGON Religare Wealth Protect Plan
- Birla Sun Life Platinum Plus-III
- Bajaj Allianz Max Gain
- Tata AIG Apex Invest Assure
- Reliance Highest NAV Guarantee Plan
Should you invest?
The way these plans are aggressively marketed (with limited information) by the insurance companies, any investor would get lured. After all who won’t like to have great returns without any risk? But we have to remember that there are no free lunches in this world. Since there is limited risk, these schemes would never give returns similar to pure equity schemes. Besides, most of these plans are for minimum of 7-10 years. In that period returns from equity are bound to be positive and greater than that from these schemes.
So if you are an investor who wants to protect his capital and is happy with small upside, then you can definitely opt for these schemes. For all others, its better to keep away.
