Guaranteed NAVs: Are they worth a second look?
Are guaranteed products good, bad or ugly? Any of these could be a fitting opinion depending on the person under consideration. Several factors need to be well thought out before pronouncing a judgment on these products. Is it for a 20-year-old or a 50-year-old? What is the risk profile of that person, what are her/his goals, when does s/he want to retire? What does her/his existing portfolio look like?
Apart from the specifics of the person, it will also help to look at where the markets are at that time (when the investment in such a product is amde) and where you see it heading in the long run.
To quote an example, one of the first of its kind, Birla's Platinum Plus series II was launched during August and December 2008, when the Sensex was around 14,000. You would have already read in multiple articles about the allocation proportions the product has to adopt to make the guarantee available to all investors.
In a nut shell, there will be high equity allocation in the initial years after which the fund will start moving into debt in increasing proportions to ensure that sufficient money is locked in to provide for the guarantee. Coming back to the example, it made perfect sense to invest in the Birla product back in 2008 as investors were positive about the markets growing even in the short run.
Given below is a real life example of absolute returns made by an investor in this plan:
Guaranteed NAV: Rs 15.5508
Guaranteed maturity benefit: Rs 21,01,973
December 28, 2008: Rs -10,00,000 (The investment made in the first year; shown negative because it is an outgo from an investor's account)
December 28, 2008: Rs -500,000 (The investment made in the second year; shown negative because it is an outgo from an investor's account)
March 23, 2010: Rs 20,48,594 (In two years an investment of Rs 15,00,000 has increased to Rs 20,48,594, a gain of 36.57 per cent)
Return till date: 36.57 per cent
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Photographs: Rediff Archives
Guaranteed NAVs: Are they worth a second look?
Note that the investor here is yet to pay his last premium and he's already locked in 39.56 per cent over 2 years. If the NAV remains the same over the next 8 years, his annualised return comes out to about 4 per cent. But, if we assume an increase of even 6 per cent here on the locked NAV, assuming that they would invest everything in debt products henceforth, the return then becomes 9 per cent post tax.
While in the past one had reason to invest in this genre (looking at the above example), it's altogether a different ball game now. Markets are closing in on 18,000 and while we are positive on the growth of the markets in the long run, the short run is uncertain.
On the other hand, guaranteed products have become the rage, with every company launching one and every agent selling them to all. At this juncture, we'd like to highlight certain instances where we believe the product will be a good fit:
- A 50-year-old closing in on retirement, requiring moderate returns and a safe instrument to park his funds in: The product ensures safety through capital protection.
- Investors who wish to park funds in a short-term instrument and are vary of the markets: The product provides for a blend of equity and debt.
- To meet a shorter term goal such as a child's education in 10 to 12 years: The product can provide for both protection as well as investment.
Click NEXT to read what you need to know before you take the plunge
Guaranteed NAV products: Are they worth a second look?
Considering the sheer volume of (mis)selling that these products have attracted, here are a few factors for you to keep in mind before you decide to take the plunge:
Horizon: The longer you stay invested, the better are the chances of making higher returns.
Fund management: Although difficult to determine, past performance can be an indication of future performance. This added to some basic knowledge of the various fund managers can help you sift out the unnecessary ones.
Charges: The charges of allocation, fund management etc should be comparable against peers or lesser than them as costs affect the NAV as well.
Maximum equity allocation: The maximum equity exposure that the scheme can take will help you determine if it is too risky or too conservative for you. Of course, this is just an indication and will not help in evaluating actual exposure the fund managers may take at any point of time.
Your requirement: Do you actually need this product? The product may be a very good one, but you may not have an appetite for it. It is always better to invest in products you need and understand.
Suitability quotient: Invest in a product only if it suits you; if you don't know why you are investing in it, don't! Every investment should have a purpose, a goal.
The important fact here is to be clear on the need and the product you are getting into. Before you fall for the advertisements and your agent's promise of exorbitant returns, check whether you need it and what you need it for.
The product offers you, to put it simply, an opportunity to park your funds in a safe yet promising avenue where you don't fear making a loss but look forward to seeing the gains. In no way is deciding between the numerous options easy or safe, so choose carefully.