Capital Protection and its cost

Is the market going to go up or go down? Well we all have tackled this question in many is one more!

One ‘Wealth Manager’ came to me recently with a PMS scheme which gives me a 12% assured return (over 3.25 years not annually) – and this fund will invest in a mix of debt and equity shares. The structure is typically a nifty linked pms – which means my downside is protected but I will participate in the upside upto a particular level…after that it becomes a profit sharing business…so i have some upside, no downside. It sounds like a great scheme, correct?

Well, it works like this. You get Rs. 100 from the client you invest about Rs. 80 in G-sec at say 8% p.a (just for explaining not saying that G-sec of a 3 year maturity is available at that price). This will grow to Rs. 112 in 36 months. With the remaining Rs. 20 you buy Nifty options – and hope it gives a fantastic return in the next 36 months. Of course trading in the nifty may give even better results..with added costs of course.

Do I like such products, no I do not. All kind of cap protection products come with a high cost – in this case the upside was being capped by the profit sharing mechanism. In case I need the money in exactly 3 years, then perhaps I do not mind looking at this product, not otherwise. Equity markets are risky if you need the money on a particular date – however if you are investing for an ‘indefinite’ period and are not worried about such interim dates…such ‘guaranteed’ schemes do not hold much water.

Since many people have already written about the ‘Highest NAv guaranteed plan’ and many sales people have already sold it I will pass the temptation to tear that product apart….

So funny when people get a ‘traditional’ plan – which is a kind of an assured return (albeit a poor investment) they look for ulips. Now they want guaranteed nav in an ulip. Paradoxical, but take my hats off to the industry for creating such games! Kudos!!!

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