THE MYTH OF HIGHEST NAV GUARANTEED FUNDS

A number of Highest NAV Guaranteed Funds have emerged in the last Financial Year and now most of the Life Insurance Companies offer ULIP products with option to choose Highest NAV Guaranteed Funds.

These products have been marketed essentially as a Capital Guarantee products that are supposed to ensure that in the worst case scenario, one would, in the least, not lose the amount invested.

However, the point I want to draw attention to is that even Capital Sum invested in the fund is NOT GUARANTEED.

Basically, the Amount refunded on maturity of the Fund is a function of – No. of units held on maturity X (multiplied by) the Higher of the following two:-

a). the Highest recorded NAV (generally, during the first 7 years) of the subscription of the Fund ; or

b). the NAV on the maturity of the Insurance contract (generally 10 years).

The guarantee is for the “Highest recorded NAV (during the first 7 years) of the subscription of the Fund” and NOT for the “No. of units held on maturity”.

The Fund Management house will levy various charges annually – namely, Mortality Charge, Fund Management Charges, Guarantee Charges, etc. + Service Tax payable to the Government collected on these Charges during the tenure of the Fund. These charges are of  fixed amounts and specified in Insurance Contract. These charges will be collected by extinguishing (a simpler term – “reducing”) the no. of units held by the investor at the rate (@) of the NAV on the date of levy of charge, usually the policy anniversary, every year.

The fine print is

1. ‘Highest NAV’ recorded previously is not used for reducing the ‘no. of units’ held by the investor for computing the levy of Mortality, Management & Guarantee charges by the Fund House.

2. Irrespective of fund performance – the no. of units held by the investor will fall because of the levy of these charges,

a. the fall in holding will be steep if the fund performs badly (the lower the NAV, the higher the fall in holding).

b. the fall in holding will be less if the fund performs well. (the higher the NAV, the lower the fall in holding).

(Example – if the NAV on the date of levy of charges is Rs. 5, Rs. 10 & Rs. 15 respectively, for a charge of Rs. 1500/-, the no. of units reduced would be 300, 200 & 100 – the lower the NAV, the higher the fall in holding, and vice cersa).

3. As stated earlier, amount refunded on maturity of the Fund is a function of – No. of units held on maturity X (multiplied by) the Higher of the following two:-

a). the Highest recorded NAV (generally during the first 7 years) of the subscription of the Fund ; or

b). the NAV on the maturity of the Insurance contract (generally 10 years).

Since, irrespective of the fund performance, there will be a fall in the no. of units held by the investor on maturity (the fall being steeper, if the fund performs badly). Unless the fall in units is compensated by an extraordinary performance of the fund, in a worst case scenario, the investor may lose even his capital sum invested in the product.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s