In the last quarter of financial year, every one rushes to save tax and this is the time when the highest NAV guarantee plans are offered in the market to take care of your investments and tax savings. Have you ever thought that why do companies pick this slot of year. There is a human psychology behind this. People often do not plan their savings round the year (which definitely is not the right practice), then they worry about the tax deductions and savings at the end and exactly at this time companies offer to invest in their plans and people pick it up in hurry without making thorough investigations and without applying their logic. The offer says “invest in the plan and get highest NAV (net asset value) guarantee for last 7 years. A company is offering you the highest NAV and is giving guarantee as well. The offer seems to be lucrative enough and easily get fooled by it.
Before investing have you ever thought that the company is not offering or guaranteeing highest returns, but it is offering highest NAV and there is actually difference between both the things?
As per the guidelines of SEBI, mutual fund cannot guarantee returns, whereas IRDA has given its approval to such guaranteed returns. This means that the insurance companies have an option to come up with a plan, link it with the market, offer tax savings and guarantee returns to the investors.
How does highest NAV guarantee plan works?
Practically, a company can guarantee you a NAV only when it is sure that they can invest your funds in assets that are less risky and are not expected to fluctuate much. Companies invest the major portion of the fund in equities for it offers high returns in comparison to debt. And once the returns are earned, they transfer the money from equity to debt so as to stabilize the returns while maintaining what has been guaranteed to investors.
Example – Looking at the bullish market conditions, fund manager invested 100% amount in equity. When after 2-3 years, fund manager foresee a decline in the market, he will shift the major portion of fund to debt. The returns of equity are higher, whereas the returns from debt funds are fixed but are low. This mix and match is done in a way that it matches with the highest NAV attained in the rising phase of market.
I want high returns, should I invest in these plans?
First of all, you need to understand that the NAV is guaranteed under these plans, not your returns. If you talk about returns, then you will get a moderate level of returns say, 8-11%, whereas direct investment in equity can give you more than this (depending upon the share and timing of your transactions). These funds are usually offered for a period of 7 years. In the initial years, as the fund manager has invested funds in equity, you may find your fund giving you a return of as high as say, more than 40%. But in 4th year, it declined to 19% and by the time your fund will mature, i.e. at the end of the 7th year, it will hardly be say, 10.6%. So, there is no guarantee for the returns, the guarantee is applicable only on the NAV. I hope, with this you must have got a fair enough idea whether to invest in these funds or not if you are looking for a high return yielding investment avenue.
Will the guarantee of highest NAV be applicable to my nominee?
If you survive the term period of the plan, then you will get guaranteed highest NAV. But if you die, then the condition of highest NAV will not be applicable on your nominee and he will get only the prevailing value of your fund.
A fund manager can not invest 100% fund in equity for long because these are risky securities. If the market goes down, then he will not be able to give you the guaranteed NAV. In addition, costs like fund management charges, premium allocation charges and annual charges dent your returns and you don’t get want you must have expected. Anyways, before you step up to invest in highest NAV guarantee plans, it is in your personal financial interest to read the offer document carefully.
Always remember that these funds are offering guaranteed highest NAV not highest returns.