The financial markets in India offer a variety of investment options for investors in India looking to create wealth over the long term. Some of these options offer guaranteed, non-market linked returns, while others offer market-linked benefits. Among the plethora of alternatives available to choose from, ULIPs are a unique category of products that give investors the dual benefits of investment as well as insurance. With ULIP in your portfolio, you can balance your life insurance as well as investment needs.
To understand how this is possible, it is important to begin at the basics. What is ULIP? How do ULIP investments work? These are some of the things you need to understand better, so you can appreciate and adopt the tips that can help you catch up with your goals using ULIP insurance plans.
So, without further ado, let us get to know this investment option better.
What is a ULIP?
A Unit Linked Investment Plan (ULIP) is an investment option that gives you two primary benefits. The first is the advantage of investing in market-linked funds like equity funds and debt funds. The second is the benefit of life insurance coverage. In order to experience both these benefits, you are required to pay a premium to the insurance service provider. This premium is used to provide the benefit of life insurance and investment to you, the policyholder. The amount is channelized into the funds chosen by you, thereby giving you the opportunity to earn market-linked returns over the long term.
How do ULIP investments work?
Every Unit Linked Investment Plan (ULIP) has a different set of ULIP funds that you, as the policyholder, can choose to invest in. Therefore, if you choose to invest in a particular set of ULIP funds, you will acquire a certain number of units in the ULIP funds that you select. The number of units will depend on the NAV of the fund at the day of investment.
ULIPs also allow investors like you to switch your portfolio between equity and debt funds. This essentially means that after you have invested in equity funds, for instance, you can switch your corpus from equity to debt funds if you wish to adopt a more low-risk approach or if you anticipate a bear market. Conversely, if you initially invest in debt funds, and if you wish to change your approach later on to a more risk-aggressive investment strategy or if you expect the market to perform well, you can switch the corpus from the debt funds and invest in equity funds instead.
This way, you can make smart financial decisions depending on your life goals and the market conditions.
Since ULIP insurance policies offer the double benefits of the opportunity to create wealth along with life insurance coverage, they are one of the more sought-after investment plans for people looking to catch up with their wealth goals. If you, too, are keen on fulfilling your goal of creating long-term wealth, you may choose a ULIP that aligns with the life goals that you wish to achieve.
Tips to catch up with your wealth goals using ULIPs
Your life goals may seem simple when you first think of them. However, with time, as inflation kicks in, you will start to realize the level of wealth needed to fulfil those goals. Merely saving up your money cannot help you achieve your wealth goals successfully. What you need to accomplish them are investment options like a ULIP insurance.
Here are some tips to help you catch up with your wealth goals using ULIPs -
• Make use of the power of compounding
Compounding is the process by which you earn returns on the interest generated on the initial investment amount. In other words, your money is compounded, so you earn interest on interest. The true potential of compounding can only be realized if you remain invested for a long period. Fortunately, ULIP insurance plans offer you this advantage.
The Insurance Regulatory and Development Authority of India (IRDAI) in 2010 announced a few changes, with one of them pertaining to ULIP plans. Earlier, ULIP investment plans had a lock-in period of 3 years, which has since been increased to five years. So, if you remain invested during the lock-in period, you can benefit from the power of compounding, which may help you generate enough wealth to achieve your life goals.
• Keep your investments aligned with your life goals
As we have already seen, you can choose from ULIP funds like equity funds and debt funds. This feature of fund switching can be leveraged smartly to help you remain on track and fulfil your wealth goals as planned. With ULIPs, you have the flexibility to transfer your units from one ULIP fund to another within the same plan. These funds can be equity funds or debt funds. Fund switches like this make it possible for you to align your investments with your life goals.
That is not all. It even ensures that you get to protect your investments from market fluctuations to a certain extent. You can do this by diversifying your investments between equity and debt funds. For example, if your goal is to create a certain level of wealth another 10 years from now, you can choose to invest a major portion of your corpus in equity ULIP funds, because in the past, equity funds have generated good returns over the long term. Moreover, as your wealth goal gets closer, you could steadily switch your investments to debt funds to lower your investment risks.
• Tap into the advantage of rupee cost averaging
Rupee cost averaging is the process by which the average costs of your investment is lower than the average market price. This happens when you invest in an asset frequently, in small amounts, over a longer period. For instance, say you purchase 100 units in a ULIP fund at Rs. 30 each today. Moreover, a month later, you invest in another 100 units at Rs. 45 each, and later, after another month, you purchase 100 more units at Rs. 40 each. The average cost of each unit works out to be lower, at just Rs. 38.33.
With ULIP plans, you can invest in a disciplined manner by paying premiums monthly, quarterly or annually as per the policy terms and conditions, and take advantage of rupee cost averaging. This could lower the cost of investments, so your returns may be maximized over the long investment tenure. In addition, you may generate wealth optimally to fulfil your life goals.
These tips can help you invest in ULIPs smartly and generate the returns needed to fulfil your wealth goals using ULIP investment policies. Make sure you understand your alternatives before investing, and plan, so you maximize the benefits from your ULIP.