After the recent crash of the markets in the last few years, cautious investors were now looking for safe equity linked product (as mutual funds also fell to the same extent as markets). They wanted safe investments and also wished to enjoy high returns of the equity markets. Seeing this requirement of an unusual product, many companies launched schemes under the name of "Highest NAV Guaranteed Plans" to take advantage of those investors who burnt their fingers by investing in markets during the same period.
These schemes come with a lock in of 7-15 years wherein you’ll be able to redeem your investments at an NAV which was highest during these 7 years. Let’s say, the NAV of the scheme was Rs 55 in the 6th year but during the time of redemption it comes down to Rs 48; however you will not be impacted by this fall since your investments will be redeemed at Rs 55. These products don’t actually offer what you think they are offering. That is, they do not offer equity returns that never fall. Instead, they offer an investment system with a very long lock-in (seven to ten years) in which protection is achieved by progressively putting your gains in a fixed income assets which will give returns far more slowly than a pure equity option .These plans use strategies like Dynamic Hedging and CPPI (Constant proportion portfolio insurance) techniques.
An example will give better understanding of the things.
At the Start of the Scheme
NFO issues the units at Rs. 10.
A part of the fund is invested in the debt market while the rest in equities.
Investments in debt secure your principal while in equities give you higher returns.
Thus the product as a whole is designed to give you safe and secure investments taking only a limited risk.
