Many investors choose to invest for their life goals in the stock markets because of the potential high-risk high-reward proposition that equities offer. While some invest a lump sum amount to optimize their returns from the burgeoning equity markets, it is prudent to spread their investments across the year by making systematic investment each month. This can enable them to tide over the ups and downs in the stock markets.
One way of tiding through the market volatility is through Unit Linked Insurance Plans (ULIP). ULIPs invest in market-linked instruments such as stocks and bonds, thus enabling an investor to build a corpus for their life goals. In ULIPs, the value of each unit is determined by the daily price movement of the stocks and bonds in which it invests.
Let's understand how monthly investments in ULIPs can enable you to reduce market volatility and create a stable portfolio:
The power of compounding
Compounding is a powerful concept. It resembles a multiplier effect as the interest earned on the initial capital further earns interest. This is a long-term investment strategy that combines your principal with the re-invested income to help your investment grow. The key to take advantage of this concept is to invest early and wisely for higher wealth accumulation. The investor can enjoy the benefits of the power of compounding through month-on-month investments in a ULIP plan that gives time for the funds to compound due to its long-term orientation.
The advantage of rupee cost averaging
The concept of rupee cost averaging is the averaging out of cost with investments of a fixed amount at regular intervals. This enables the investor to buy more units when prices are low and fewer units when prices increase. With this method in place, the investment risk is spread across market movements. For example, if the individual invests ` 5,000 each month, he or she could obtain 50 units at the cost of ` 100 for each unit. Due to negative market sentiments and a decline in prices in the next month, the individual could acquire 55.56 units at the cost of ` 90. In the long-term, regular investments on fixed dates average out losses due to market volatility and ensure the individual is able to maintain a stable portfolio. With regular investments in equity funds, ULIPs can help a retail investor gain from equity markets - irrespective of whether the market condition is bearish or bullish.
Benefitting from monthly investments
A ULIP plan provides an investor the option to invest a sum each month, as little as ` 5,000, as opposed to quarterly, half-yearly or annual investments. Investing a small amount every month is easy on the pockets, and a better method to navigate market volatility. With the higher frequency of investments, the investors can benefit from lower volatility risks. An investor can use a ULIP return calculator to understand his or her maturity benefit from these monthly investments.
Maximising gains through fund switching options
ULIP offers investors the flexibility to switch between different funds available. Through this benefit, an investor can move their investments fully or partially from one fund to another within the same ULIP plan. This strategy helps the investor's funds against market fluctuations and enables him or her to optimize returns. The switches can be made on the basis of market conditions, term to maturity, and individual asset allocation & risk profile. Monthly investments also allow the investor to track ULIP investments on a regular basis and switch when required. Today, many ULIPs provide unlimited free switches.
Meeting life goals
The month-on-month investment strategy enables the investor to build an inflation-adjusted corpus over the long term by tiding over market volatility. With systematic monthly investments, your life goals will be closer than you realize. At the end of the policy term, investors get a maturity benefit which helps them achieve the life goals towards which they invested.
With a ULIP plan, the investor can realise his or her life goals through systematic investments and defined time-frame. The power of compounding concept, rupee cost averaging principle, fund switching option, and disciplined investments work together to enhance the chances of healthy returns and take him or her a step closer to fulfilling financial goals.