LIC being the single-most dominant player in the financial sector of India; as it generates 72% of the total insurance revenue and major stakeholder in most of the PSUs like COAL INDIA; manage to attract the maximum number of savers/investors in India. And so most of its plans are in the limelight, attract heavy public interest, and generate huge resources for the company. Also because most of the investor community in India have blind faith on LIC, be it any life insurance policy, term plan or Highest NAV Guarantee fund and start lapping up any offer from them, it is of utmost importance to try and understand the product, and its implications on the investor’s money.
Today, let us see two of LIC’s comparatively new offerings with an attractive tag line of “Highest NAV Guarantee Plans” by the name LIC Wealth Plus Plan and LIC Samridhi Plus Plan
How LIC Wealth Plus Plan Works
LIC Wealth Plus Review – Under this plan an investor is required to pay premium only for 3 years and the total policy duration is 10 years whereas in LIC Samridhi Plus, policyholder will be required to pay premium for 5 years during the total policy duration of 10 years. In case of Wealth Plus, LIC gives guarantee to its policyholders that they will be getting fund value which will be highest NAV during the first 7 years of the policy or at the time of maturity whereas in case of LIC Samridhi Plus, LIC gives guarantee of the highest NAV during the first 100 months of the policy (roughly 8 years) or at the time of maturity. You can get LIC Wealth Plus NAV history chart from this think link http://www.licindia.in/plan_history.htm . LIC Wealth Plus Current NAV chart and its highest NAV can also be available from the same link
The very concept of “Highest NAV” is such that it creates false sense of huge profits in the minds of policyholders. A layman gets an idea that with this investment, he will be secured of any market ups and downs as the company is giving “guarantee” on the highest return, but that is precisely the point on which LIC and its agents play on the mindset of average Indian investor.
Under these Guaranteed NAV plans, fund manager has the discretion to invest either fully in equities or in debt. So it will not be like the fund will be investing in equities all the time and thus managing to give upside returns like the Sensex. Fund manager cannot afford to be in 100% equity at all the time under such funds because of the word “guarantee”
How Highest NAV Guarantee Fund Work – What Insurance Agents would Tell You
Lets put this through a hypothetical situation where both of the funds started with NAV of Rs 10 in 2012. Now in the next 3 years (till 2015), Indian stock markets performed very well and NAV of these funds have reached Rs 20 i.e double the money invested. So this Rs 20 will be locked as highest NAV in the system which LIC is bound to give to the policyholder at the time of maturity and that is 100% returns. Now for next 2 years (till 2017) let’s assume the market will be stable and show only marginal gains and the NAV of this fund moved to Rs 22 (NAV increased by Rs 2 because the fund had some debt portion in it) . Now this NAV of Rs 22 will be locked which will be provided to the policyholder at maturity. But suddenly markets unfortunately see a huge crash as was in 2008 and NAV of this fund falls down to 11.50 during the last 2 years of the policy. So during the maturity of the policy at 2019, NAV was somewhere around Rs 11. But because of “guarantee” given by LIC, redemption will be done at Rs 22 only as the highest NAV recorded during the policy tenure. So this loss of Rs 11.5 per unit (highest NAV 22 – actual NAV at the time of maturity being 11.5) will be borne by the company. Now this figure of Rs 11 per unit looks very small but in actual life, LIC would have sold crores of such policies and so units to be redeemed at the time of maturity would be in billions and the direct loss to LIC in such a scenario would be 11 billion rupees. I bet, not even LIC can afford such a loss.
To avoid such a scenario, LIC has made it clear from the very onset that fund manager has the discretion to invest in either equity or debt from 0% to 100%. In actual life too, the moment NAV crosses a particular threshold, fund manager will automatically switch from equity to debt to protect the gains so as to pay out the guarantee. With such a scenario, let’s see the performance of these funds since its inception by following this link https://www.licindia.in/plannav/plan_navs_history_new.html
In this link at official site of LIC, it clearly shows that Wealth Plus plan’s NAV which was launched in Feb 2010 at Rs 10 is currently standing at Rs 9.58 on May 2012 (In a time span of roughly 2 years) and Samridhi Plus plan’s NAV which was launched in March 2011 at Rs 10 is currently standing at Rs 10.40 with the highest NAV recorded in between at Rs 10.59.
How Highest NAV Guaranteed Plan Works – Second Review
Let’s assume the NAV of the fund on Day 1 is Rs 10. The fund manager of the guaranteed NAV plan invest 100% in equity and market give 50% return in the next two years and the NAV of the fund moves to Rs 15. Now assuming the policy term is for 7 years, the insurance company would invest in such a way in future that it is able to give its investors a minimum NAV of Rs 15 at the end of tenure i.e 7 years. So they would shift some x amount from equity which has become from Rs 10 to Rs 15 now to debt instruments so as to make sure that x amount becomes Rs 15 at the end of maturity considering a debt return of 7-8%. Now in this case, after I have made calculations Rs 10.5 would become Rs 15 at the end of the policy tenure (after 5 years) considering 8% return from debt instruments. So that x would be Rs 10.5 in this case. The fund manager would invest Rs 10.5 in debt and the remaining Rs 4.5 would remain invested in equities to take the advantage of further upside in the equity markets.
Now the process would go on. Now Rs 10.5 is already invested in debt by the fund manager to make sure it becomes Rs 15 at the end of the tenure. Now if this remaining Rs 4.5 becomes Rs 6 after investing inequities, he would lock this Rs 1.5 of profits by again investing in such a way in debt that it becomes Rs 6 at the end of the tenure.
You must read it properly: Its “Highest NAV Guaranteed” not Highest Return Guaranteed” and you are advised not to link it completely with equity markets that if Sensex would give 200% returns in the next 7 years and they would also get this highest return. You would get highest NAV delivered by scheme that can be only 40-70% returns in 7 years sometimes, not highest returns delivered by Sensex during tenure of the policy.
- Generally, you should expect a return of around 8-10% from these guaranteed NAV plans because after making initial gains from equities, it becomes more of a debt fund and the high hidden charges like premium allocation charges and fund management charges of this fund takes away return from the hands of the investor
- Some of the guaranteed NAV plans have given less returns as compared to ULIP plans even
- Another important thing to note over here is that you will get the highest NAV only if you survive the term of the entire policy period. In case of death of the policy holder, the nominee would get the existing fund value which may be less than the amount you initially invested
- Some of offerings from other insurance companies in India are ICICI Prudential Pinnacle Super Plan, Bajaj Allianz Max Gain plan, SBI Life Smart ULIP, Reliance Highest NAV Guaranteed Plan
Hope this will clear any doubt which is there as to these “highest NAV guarantee” plans. They are not meant to provide the highest return of the market of the said period. It will provide only the highest NAV of the particular fund during this 10 year period – the fund where fund manager has the authority to move 0% to 100% from equity to debt. Even IRDA has come out strongly against such plans. Only one message/learning for our blog readers for such plans/policies – stay away.