- Wealth PMS
Read Manish Chauhan’s excellent post on Agents misselling LIC Wealth Plus. The product promises the highest NAV in the next seven years, and some agents are trying to sell this by using the NAV of a different policy (that does not have such a guarantee) and thus offering ridiculous rates like 40%!
This is hardly surprising for ULIPs – a substantial amount of misselling happens there. But is the highest NAV product not worth it anyhow? Deepti Bhaskaran in Mint says that you may get the highest NAV, but not the best returns.
The way it’s done is straightforward. Let’s say you have Rs. 100, which you have to guarantee highest NAV for seven years. I can put Rs. 63 in a seven year bond yielding 7%, and the remaining 37 can go into equity. (The Rs. 63, in seven years will grow to Rs. 100, so even if the equity portion goes to zero, you’re ok). After a year, assume the equity portion increases to Rs. 67. The New NAV will now become Rs. 135 or so (some returns will happen on the debt portion as well). Now you must guarantee 135 – so you move more money into debt – perhaps now it’s Rs. 100 debt, rest equity.
What happens if the market goes down? The allocation to equity does not increase, because that will introduce risk to the guarantee. Yet, the right thing to do for a product that is supposed to yield high returns is to keep a healthy equity portion.
With guaranteed products, that is simply not going to happen. So you might get a stroke of luck and a decent return, but in a market that goes down a lot and then revives, chances are you will seriously underperform. LIC’s wealth plus and other insurance company ULIPs won’t tell you this; unfortunately most buyers will find out only the hard way. It could be a useful product, though, for someone who understands the risk and still wants the guarantee; but the costs are fairly high.