There's a popular refrain in the financial circles, Don't try to time the market, instead give your investments enough time to grow. This is more so in the case of investments in equities.
Various studies suggest the longer you remain invested in markets, the better are the returns. The trick with any investment, therefore, is staying invested long term without worrying too much about the market ups and down.
Why Long-term Investment Works
When you give your investments enough time, the Power of Compounding works best to help your investments grow. Compounding basically, means adding the gains from your investments to the initial invested amount for future growth. The profit is reinvested, and this goes on till the time you remain invested.
Warren Buffet, investor and philanthropist credits the principle of the power of compounding as one of the main factors for his growth. This approach allows you to maximize the growth or profit from your investment over the long term.
Let's understand the concept of compounding with an example. Suresh, aged 30, starts investing ` 5,000 every month towards his goal of retiring comfortably. If he stays invested for 30 years, then at the age of 60, his retirement corpus will amount to ` 75.01 lakhs, assuming an annual return of 8%. On the other hand, let's assume Ramesh, aged 40 starts investing ` 10,000 monthly, towards his retirement corpus. Assuming that Ramesh also earns 8% annual returns on his investments, his retirement corpus at the age of 60 would amount to 59.29 lakhs. Suresh managed to generate a relatively bigger corpus for retirement (` 75.01 lakhs) despite a lower investment (18 lakhs) as he started early, gave more time to his money (investment duration of 30 years) and thus, benefitted from power of compounding.
Another benefit of long-term investment is that it sees through different economic cycles and averages out any losses due to short-term market movements. If you had invested ten years ago in May/June of 2008, your investments would have experienced the worst of the crash in equity markets during 2008-09, then again another fall in 2011. Yet in 10 years, the Sensex index of the Bombay Stock Exchange has moved from around 8,000 levels to 35,000 levels - almost four times in 10 years.
Stay Invested For Entire Term To Get The Return of Mortality Charge (ROMC) Advantage
ULIPs are structured to provide you the possibility of better returns over long term. Besides leveraging the benefits of Power of Compounding and Rupee-Cost Averaging, your overall costs come down keeping in mind the charge structure. For instance, the fund management charges are capped at 1.35%. All charges - premium allocation charges, policy administration charges, fund management charges and the life cover charges are calculated as per the policy terms and conditions. In fact, the net reduction in yield (at maturity) is as low as 2.25% for a policy with a term of 10 years.
Some new-age ULIPs have also started rewarding investors who complete the full policy tenure, for instance Bajaj Allianz Life Goal Assure returns the entire mortality charge deducted during the tenure of the policy at maturity. Of course, the policyholder has to remain invested for the entire tenure of the plan without missing any premium payment.
Depending on the age of the policyholder and several other factors like gender, sum assured, etc., mortality charges may vary, and when added back to your fund value at the end of your policy term, they enhance your fund value.
ULIPs are tailor-made for long-term investment, which in itself provides possibility of better returns from the equity market. Additional benefits like ROMC add to your fund value and make it all the more lucrative. So, stay invested till the end to get the maximum benefits.