Over the past few months, one after another, a number of insurance companies have launched Ulips, which promise to repay investors on the basis of the highest NAV that the fund has achieved. The pitch is that these funds’ NAVs effectively do not drop. Once a level is achieved, then the investor is assured of getting at least as much, no matter what happens to the market.

It’s certainly a very attractive idea. From the way insurance companies are stampeding into launching such products, I’m sure investors must be putting in their money in good numbers. Within a couple of months, six insurance companies have launched such products. Any investor who is told of this concept will immediately start salivating at the thought. Imagine how rich you could have been had you been invested over the past 10 years and had been able to lock your investments at the magical value that the markets achieved on the day when the Sensex touched 20,873!

Any investor thinking about this product would say, “What a wonderful idea!” Why don’t all investment schemes —whether mutual funds or Ulips or even portfolio management schemes offer this kind of a protection on all their products anyway.

The answer to this obvious question is simple. There is no free lunch. 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 10 years) in which protection is achieved by progressively putting your gains in fixed income assets, which will give returns far more slowly than a pure equity option.

The lock-in and the non-equity assets make this a very different kind of investment than the equity-gains-without-losses dream that these funds’ advertising seems to imply.

However, even that is not the real reason that these funds are useless. The real reason is that if you are willing to lock in for seven to 10 years, then practically any equity mutual fund will deliver this dream of equity-gains-without-losses.

Seven years is a very long time. Over such a period practically any equity portfolio into which any kind of thought has gone would capture substantial gains. This is not a mere conjecture. Since at least 1997, the minimum total return that the Sensex has generated over its worst seven years is 12 per cent, which was over the seven-year period from July 6, 1997 to July 5, 2004.

The truth is that in a growing economy like India, it’s extremely hard to lose money over a long period like seven years. If you are willing to lock in your money for seven years, then for all practical purposes, you have a guarantee of making a profit.

Of course, this is not a guarantee that is signed in a contract and legally enforceable, but it's the kind of guarantee that any thoughtful investor would be willing to believe in. Mind you, this is also not a guarantee that you will get the highest NAV achieved. But again, that’s the kind of thing that can’t be attained if you want the gains of pure equity anyway.

The most instructive thing in this whole business of guaranteed highest NAV products is the contrast between the illusions spun by those peddling complex financial products and the reality of simple, straightforward investing. It just reinforces one’s belief that financial products are being designed whose goal is nothing more than to create a marketing hype, which can manipulate the psychology of the ordinary saver.