WITH Dalal Street in a range-bound mood, uncertainty has gripped investors whether to dabble in stocks right now or wait for bulls to charge. In times such as this, it’s market risks which is now playing in the mind of a first-time investor. Suddenly, investors are running for safe cover and insurance activity has heightened, especially Unit-linked Insurance Plans (ULIPs). But, is it really advisable to invest in a Ulip? Making the decision could become simpler if you are acquainted with the finer details.
For starters, a Ulip is a scheme which in addition to a life cover also gives you an opportunity to make investments. In simple words, a two-in-one plan which offers benefits of life insurance plus savings. Here’re five reasons why an investment in Ulips makes sense in the current market conditions.
WEALTH CREATION
Insurance experts advise that you should buy Ulips with a long-term orientation and not give much importance to market corrections. Ulips have always been seen as a good long-term source of wealth creation in an emerging market. You must considers a Ulip with a period of 10-15 years in mind. Experts believe that by investing for a long time frame, you are allowing yourself to witness two cycles of the bull and the bear run. If you can allocate resources rightly, you can derive maximum gains when the bull is charging ahead and leverage it during a bear run.
GOAL-BASED INVESTMENT
According to insurance experts, if you are a risk averse investor and believe in goal-based investing, Ulip is an ideal financial product where you can park your funds. Depending on your life stage, you can decide on equity and debt mix in your plan. Thus, in line with your financial expectations, it gives you a platform to plan for your child’s marriage or your retirement needs. This apart, it provides an extra cushion of a life cover, which means in case you are not alive to take care of your family, your family financial goals are intact and on track. Moreover, being an insurance product, you enjoy tax benefits under section 80C on the assets generated via this plan.
DISCIPLINED APPROACH
Seek discipline and find your liberty. If you believe in this philosophy, then a regular premium Ulip is a must in your portfolio. With a regular premium product, you need to pay premium for a minimum stipulated period, such as three years. This product works like a systematic investment plan and acts as a hedge against volatility in the stock market. Along with the long term portfolio profile, systematic investment in Ulip acts as an additional risk-mitigation tool. By investing a fixed amount in Ulip at regular intervals, you not only average out your returns but also offset the volatility of capital markets.
FLEXIBLE & TRANSPARENT
In terms of flexibility, insurance experts feel that Ulips have an edge over mutual funds. You have an option to switch between the investment funds to suit the changing requirements in life. This feature, believe experts, allow an informed investor to benefit from the vagaries of the stock market by switching from high risk to low risk fund options. Further, you have an added advantage of switching between funds which offer different ratios of equity and debt, a few times without paying any extra fees. But you should always remember that these options are designed not to speculate in the market but to help you choose an option fitting your risk appetite, investment horizon and objective, and your life stage.
MULTIPLE INVESTMENT OPTIONS
The best part about buying a Ulip is that you have multiple options at your disposal — ranging from an aggressive to a balanced or even a conservative product. If you are a conservative investor, then you can buy Ulips with a capital guarantee clause attached. The product ensures that you have a guarantee for a certain level of returns, even in the case of a stock market crash. The product structure caters to the risk appetites of different class of investors. The blend of equity and debt in Ulip offer a balanced and steady return over a period.
THE FLIP SIDE
Let’s now come to the downside. Insurance experts advise that you should be prepared for the risks surrounding the vagaries of the market, especially if your policies are set to mature in a period when the bear has the upper hand.
There is also a debate centring around whether the Ulip needs to be treated as an active or passive investment. Even while switching funds in favour of debt funds, you should keep in mind the increasing level of interest in the debt market.
Again, investing in a Ulip is not recommended for those who are highly active in the markets as they will never be satisfied with the kind of returns.
The risks are also great considering that Ulips are subject to the vagaries of the market. Those interested in Ulips also need to be wary of agents who promise returns of 30-40%. Agents often quote contextual data, for a period when the stock market was at its peak. The equity market will not give you returns greater than 14-15%. Even though insurance returns are tax-free, the maximum returns possible range between 19% and 20%.
