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Guarantee is a very appealing word. Particularly, for Indian investors. How else would you explain the hold of fixed deposits and endowment plans over them? As long as their investment delivers the returns promised, they don't mind losing out on the possibility of earning higher returns. To tap investors with this mindset, especially in the backdrop of a volatile equity market, some life insurers have launched guaranteed- NAV (net asset value) Ulips in recent months.

"Since the past two months, the markets have been fairly uncertain. Also, interest rates are high at the moment. Hence, such products are being launched," says Sanjeev Pujari , appointed actuary, SBI Life . While these products could work for some, it's best to understand their intricacies to determine their suitability instead of simply going by their nomenclature.

TYPES OF GUARANTEED ULIPS

"Guaranteed-NAV products essentially belong to two categories - one that comes with a pre-specified NAV assurance and the other where the highest NAV achieved by the fund during the initial 7 or 10 years is used to calculate the fund value at maturity," informs Pujari. In the case of the former, the NAV is pre-fixed at say. 15 or. 20. Investments are primarily directed towards fixed-income securities whose tenure is aligned with the policy's maturity.

If the policy is set to mature after 10 years, the premiums will be in-vested in a 10-year G-sec or a 10-year corporate bond. In the case of highest NAVguaranteed Ulips, you start with a NAV of. 10 with no guarantee at the outset. Initially, almost 100% of the premium amount is invested in equities. As the maturity date draws closer, this allocation can change and the composition will be a mix of debt and equity. "If there is a downturn, then the debt component will be increased in a proportion required to ensure the guarantee," adds Pujari.

THE MECHANISM

These products offer the highest NAV recorded over a given period. The premium is payable for a fixed period of around 5 years. "In the NAV build-up phase, the reset dates set by the companies are exercised. Reset dates are pre-decided dates fixed by insurance companies to record NAVs," says Jayant Pai, V-P, Parag Parikh Financial Advisory Services. Then comes the accumulation phase, which refers to the tenure remaining after all the reset dates have been exercised.

On maturity, you are entitled to the highest of the fund value at maturity or the fund value as calculated using the highest recorded NAV during the pre-defined period. Adds Fabien Jeudy, chief actuarial officer, Birla Sun Life Insurance , which offered the first highest NAV-guaranteed Ulip in March 2008: "The highest NAV registered by the fund during the first seven years is taken into account while calculating the redemption proceeds. Offering and meeting the guarantee promise necessitates monitoring the fund composition on a daily basis.

If the fund manager and the actuary see the stock market faltering, some portion will be reallocated to fixed instruments. Once they see signs of market recovery, they could get back into equity." In case of the insured's death, the fund value or the sum assured, whichever is higher, is given to the dependent. Regular Ulips offer several fund options, ranging from pure equity to only debt, and the policyholder is allowed to choose between these funds. However, with guaranteed-NAV Ulips, this is not possible. Here, you will have to settle for the capital or return guarantee fund that the company offers for such Ulips.

Source : ET Bureau