Published in Mint on, Nov 20 2012, Written by Kapil Mehta
Last year, I had to open a locker with a private bank. To do so, the bank asked me to buy a policy guaranteeing the highest net asset value, or NAV, (ICICI Pru Pinnacle Super – LP) with a payment term of five years. The premium is Rs.50,000 per year. Half of my fund is in equity and half in debt. The policy isn’t performing. I am assuming I have three options. One, I discontinue the payment. This will result in lapse of my associated insurance of Rs.5 lakh. Also, as their customer support informed, the money invested in the market would be withdrawn and I would have to pay administration charges of about 3.5% per year. At the end of the fifth year, my money would be refunded. Two, I switch to a better fund. Three, I continue with the policy. I want to invest Rs.50,000 per year in any case for my daughter who is three and a half years old. I want to create a corpus for the short term. For the long term, I have bought land.
I would like to make some general observations and then comment on your specific insurance.
First, banks are not meant to, even informally bundle locker use with insurance. Such product-focused cross-selling flies against the spirit of need-based selling that is essential in insurance.
Second, I am sceptical about the highest NAV plans because most customers do not properly understand what they have bought. Customers tend to assume that the highest equity market NAV will be assured. That is not the case as funds can be moved across asset classes at the insurer’s discretion. So if equity markets shoot up, it is likely that the fund will be moved to debt and the resulting lower NAV will be guaranteed. Also, you need to realize that guarantees come at a cost—typically 0.5% to 1% of the fund value. Some of these considerations have weighed upon the Insurance Regulatory and Development Authority (Irda), which has held back approvals of such products.
With regard to your specific product and question, your situation is not as bad as you think. Your fund gave a 5% return over the past year when the benchmark equity index was stagnant or declined, depending upon the specific dates you select. To a large extent this happened because about half your fund is invested in debt and the other half in equity. You may have also got a higher return had you invested in a debt-oriented fund but this is much easier to point out in hindsight. A year ago, when you took your investment decision the landscape was not clear.
Going forward, I suggest that you purchase a term cover with your daughter as the nominee. Since your investment requirement is short term in nature, you should continue this policy. Closing the fund is expensive. Consider redirecting future premiums into a debt-oriented fund. If interest rates fall in the future you should get good short-term appreciation. Equity funds are more appropriate for long-term investments.