Recently Bajaj Allianz Life Insurnace company has introduced a Insurance Linked Index Investment Plan called "Capital Shield". This product is being aggressively pushed by one of their Bancassurance partners, Standard Chartered Bank.
The salient features of the plan are as follows:
1. 5 times the initial amount as life cover, i.e., Rs5 lakhs for the next five years.
2. Investment allocation of 98% of the investment after deduction of the mortality charges.
The product works like this. You make the initial investment and after 5 years of the policy term, Bajaj Allianz guarantees that they would be able to return the money what you invest today. The minimum investment amount is Rs50,000/-. That is, they guarantee to return back the capital after the policy term. In this period of fast depreciating investmnets, the idea is to entice the investors with a capital protection guarantee. So what is the big thing about this product? The important thing is that portion of your investment is channeled towards buying NIFTY Call Options and the returns you would get is linked to the NIFTY returns over the next 5 years. The plan also guarantees a 15% return on investment at the end of 5 years subject to certain conditions.
Does it sound interesting to you? I have a capital protection and also at the same time I have an exposure to equity markets through NIFTY Index options. On this premise only this product is being aggressively sold. I think there are lot of questions which needs to be answered before you can invest in these structured products.
First one is the Participation ratio: This is the percentage of your investment which goes into NIFTY Index Linked Call Options in this product. Technically, this is the percentage which has been left after allocating investment towards the fixed income portion of your investment which guarantees your capital at the end of 5 years term. It is not clear from the product brochure the percentage of your investment which will go into Index options.
Unable to time the entry based on NIFTY Index Levels: In this Capital Shield Product, the entry point for you would be the average of the first 3 months from the time you invested. Actually, this is a double edged sword. You may decide to invest today just because that the NIFTY has been hammered a lot and hovering around 2700 levels. But Bajaj Allianz would not take the investment at today's NIFTY Index Level but wait for the next 2 months level to decide on the average. In case, the NIFTY goes up in the next 2 months, your entry price is averaged out upwards. Though this averaging out helps to smoothen the volatility, it defeats the very concept of trying to time the market.
Poor guaranteed returns: The plan brochure talks about guaranteed 15% return on investment over the next 5 years if the NIFTY Index moves up by 100% over the next 5 years. On plain reading this return percentage looks attractive but the fact is the return of 15% is simple return after 5 years. That is, you invest Rs1 lakh today and the NIFTY level is at 2750 and at any point of time during the next 5 years it moves to 5550, then you are guaranteed 15% on Rs1 lakh after 5 years. It works out to a measly 3% simple interest.
What happens if the NIFTY fails to double within 5 years?: There is a possibility that NIFTY never manages to double from todays level over the next 5 years. Then Bajaj Allianz is not even compelled to pay this 3% simple interest per annum. In that worst case scenario, they would pay Rs1 lakh back to you with a big thank you. They would have used your investment for 5 years and return the capital only. The product doesnt have a feature of roll over the maturity period to take care of the prevailing market conditions.
Overall, investment in Bajaj Allianz's Capital Shield product should be avoided as there are better investment opportunities in the fixed income domain itself. Our suggestion would be go for plain vanilla products compared to these structured products where fixed income and equity index futures are combined. It neither has the stability of the fixed income instruments nor gives the multi-fold returns of Equity products.
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2 comments:
My appreciation goes to you for providing such excellent analytical updates.My best wishes to you for sustaining it consistently in the future,like Sachin Tendulkar.
Why can't you analyse and write about Tata Capital's NCD issue where a coupon of 12% is offered.
Sridhar
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