Don't exit abruptly

Irda has banned the sale of highest-NAV guaranteed products. But if you have already bought one, wait for some time

For a while now, the Insurance Regulatory and Development Authority (Irda) has been unimpressed by the highest net asset value (NAV) guaranteed product. It warned insurers several times during the previous regime of J Hari Narayan. On September 30, the regulator decided to ban it completely.  

However, those who have already invested need not panic. According to financial planners, it makes sense to stay invested till the lock-in period of five years is over. You can stop paying the premium in the interim but the accumulated amount will only come to you after five years. Also, the accumulated amount will be added to your income and taxed, according to the bracket. “If the money put was linked to a goal, then take a decision accordingly or move out of the scheme and invest in equities,” says certified financial planner Gaurav Mashruwala.

In addition, if the premium is stopped in the interim, all the premiums paid till that time will go into the discontinued fund. And the discontinued fund will earn a meager 3.5 per cent on that accumulated premium, which will not be attractive as even the usual savings bank rate is four per cent and even six per cent in some banks.

The main problem with these products, according to Mashruwala, was that the product was not communicated properly to customers. "The catch was in understanding the 'highest NAV-guarantee', which the product offered."

These products were pitched in a way that they recorded gains only by investing in equities. However, an official from the industry said the product initially invested in equities to spike the NAV, then loaded the portfolio with debt to ensure that the NAV did not fall.

Arvind Rao, chief financial planner of Dreamz Infinite, says most insurers did invest much in equities. This is because, the fund managers wanted to book profits (by protecting the highest value of the fund achieved in a certain period) before the policy's tenure gets over."

Hence, most of these products give returns tilted towards debt. Highest NAV-guaranteed products are like unit-linked insurance products (Ulips) with a premium paying terms (PPTs) of five to eight years.

Another financial planner said if the returns are debt-oriented and limits the fund manager from taking advantage of the upsides in equities, then there is no point in locking funds in such a fund. One may be better off going by the book, which says keep insurance and investments separate. That is, by a pure protection cover which should be at least 10 times one's annual income, and invest through mutual funds or stocks for any equity exposure.

Additionally, these policies are expensive as one has to pay charges for premium allocation, policy administration, surrender charges and so on. Hence, weigh your options before you exit from such policies and calculated decisions.