Guaranteed NAV products sound interesting. However, there is a cap on returns and the cost is higher.
When regular products no longer seem to attract fresh funds, financial institutions are forced to come up with products that are innovative in nature. The insurance industry, it seems, is doing the same nowadays.
Around December, some insurance companies started targeting investors with guaranteed-return products. For instance, Life Corporation of India tried to woo investors with Jeevan Aastha, a guaranteed return product. Though LIC had targeted a collection of Rs 25,000 crore from this product, it finally ended up with only Rs 10,000 crore. Now LIC has launched a money-back plan, Jeevan Varsha.
More recently, a few life insurance companies launched products that would provide returns based on the highest net asset value (NAV) attained by the fund during its tenure.
Sounds too good to be true? Let’s look at the products on offer.
At present, three life insurance companies are offering this product. Tata AIG Life’s plan is called InvestAssure Apex. The minimum annual premium is Rs 90,000. Birla Sun Life Insurance's product is called Platinum Plus. The minimum annual premium is Rs 1 lakh. The third life insurance company offering this product is SBI Life, with a policy called Smart Ulip. The minimum premium is Rs 50,000. This premium is paid for the first three years only.
The Tata AIG Life and Birla Sun Life policies are open for subscription till this month's end, while SBI Life is selling its Ulip for one year. All the policies allow partial withdrawals after three years. They also allow premium reduction after the first year.
Let's look at Tata AIG Life's InvestAssure Apex. The product uses a feature called reset dates, which will be on the 10th of every month. Over the tenure of the policy, to evaluate the highest premium, the fund will look at a total of 100 NAVs on the 10th of each month.
The Tata plan has a two fund strategy. That is, when you buy the policy, the annual premium will first go to a fund called Apex Investment Fund after the applicable deductions. This money will be transferred to Apex Return Lock-In Fund immediately after the next reset date. The Apex fund invests in money market and short-term debt instrument only. This is just a parking fund.
“We want to give investors some returns during the subscription period, and also to save on the fund management costs,” said Prasun Gajri, chief investment officer at Tata AIG. The Apex Investment Fund will exist only for the first three years.
The other fund – Apex Return Lock-In – will actively manage the money by investing in large-cap stocks. This fund has the mandate to keep the entire portfolio in equity or debt instruments or cash.
To manage the funds, It uses an investment model called as constant proportion portfolio insurance (CPPI). This is a trading strategy that ensures a fixed minimum return. “This, in turn, ensures that the product's aim of paying the highest NAV on maturity is fulfilled,” said Abhay Tiwari, deputy chief actuary at SBI Life.
In CPPI, the fund allocates the corpus between safe assets (bonds and cash) and risky assets (equities), depending upon stock market performance and interest rates. The asset allocation process will enable participation in a rising equity market, while protecting the capital when markets tank.
The fund will, hence, need to continuously re-balance its portfolio during the term of the policy between risky assets and safe assets using a set formula or a mathematical algorithm.
Just like any other Ulip, a part of your money goes towards the usual deductions. In Tata AIG's case, the premium allocation charges (PAC) is 9.5 per cent in the first year, and 4 per cent in the second and third years.
SBI Life charges the highest PAC among these products. For the first year it is 15 per cent, and 5 per cent for third and fourth year. Birla Sun Life charges 10 per cent PAC in the first year and 4 per cent in the latter two.
The two funds that manage the investments have different fund management charges too. For Apex Investment Fund, there is a 0.90 per cent charge. Apex Return Lock-In Fund charges 1.45 per cent fees. Excepting for a slight variation, this is almost a standard fee. There is also a policy administration charge that varies with the sum insured across all three insurers.
Finally, there are mortality charges to provide a life cover. Here, Birla Sun Life has the highest deductions. For providing a Rs 4.5-lakh cover to an 18-year-old, the deduction will be Rs 423 per year, and Rs 1,731 for a 70-year-old. For a 25-year-old male, Rs 1,083 will be taken annually as mortality charges and Rs 21,060 for a 65-year old.
Wealth management experts said that these products are suited for investors who are risk-averse. The fund management style allows protection of principal with a small upside in the equity market.
“The transaction costs are high in funds which constantly need to adjust their portfolios, such as these products,” said an investment expert. But he added that this is not the right product category for someone who would want higher equity returns.
