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Why monthly investments in ULIPs make sense?

July 18, 2018

The daily ups and downs in the stock markets can be incredibly unnerving for a retail customer and can dissuade them from investing in the markets.

On March 1 this year, the Bombay Stock Exchange (BSE) Sensex closed at 34,047. Within five trading sessions, it had lost 739 points to reach at 33,307 on March 9. Such fluctuations can scare small investors from the equity markets, whose main priority is the safety of their investment. However, investment in equities provide healthy returns on your money.

Instead of being disillusioned by the ups and downs of the stock market, the solution is to leverage through Unit Linked Insurance Plans (ULIPs), which invest in market-linked instruments such as stocks and bonds. The value of each unit depends on daily price movement of the stocks and bonds in which it invests.

Here's how monthly investments in ULIPs can enable you to reduce market volatility:

1. Get The Discipline Advantage

One way of blunting the impact of market volatility is systematic investing. Invest a specific amount every month on a fixed date, no matter whether the market is going up or down. This strategy works well by ensuring that you get more units of ULIP when the equity markets are down resulting in lower per unit cost, and vice versa.

Let's assume you invest Rs 5,000 on the 10th of every month. In one particular month, you purchased 50 units at the cost of Rs 100 per unit. However, due to negative sentiments, most stocks in the ULIP portfolio saw a decline in prices over the next month. This resulted in a drop in per unit cost of ULIP to Rs 90 on the 10th of the next month. So, by investing the same amount of Rs 5,000, you acquire 55.56 units in that month. Over the extended period investing regularly on a fixed date averages out any losses due to market volatility. This approach uses the principals of Rupee Cost Averaging, in which you invest a fixed amount at regular intervals.

2. Easy On Monthly Budget

ULIPs offer monthly, quarterly, half-yearly and annual investment options. However, it is easier investing, say Rs 10,000 every month, than investing Rs 30,000 (quarterly), Rs 60,000 (half-yearly) or Rs 1.2 lakh (annually) at one go.

Monthly investment is not only easy on the pocket, it is also a better way of benefitting from the market volatility. The higher the frequency of investment, the lower the volatility risk.

3. Switch To Maximize The Gains

Monthly investments also allow you to take advantage of the switching option. This option basically allows you to move your finances from one fund to another within the same plan. What this means is that you can move units (fully or partially) between the fund options of equity, debt and balanced. For instance, the market is dramatically fluctuating and you are uncomfortable that your gains may be eroded. This is then a perfect situation to switch from equity to debt fund option to optimize the returns. Switches can be made based on market conditions, individual asset allocation profile and term to maturity of policy.

There are many ULIPs out there that allow you to make unlimited free switches. Investing monthly allows you to track your investments regularly and to make that switch as and when required.

4. Meeting Life Goals

This form of investment will also help you in achieving your life goals. Let's say you dream about travelling to Paris. All you have to do is decide on the amount you need to make the Paris trip a reality, then define a timeframe and a financial expert will help you decide on the appropriate ULIP to help you achieve this. With disciplined monthly investments, your life goals will be closer than you realize.

As per the Association of Mutual Funds in India (AMFI) data, only 32% of equity assets stay invested over two years. You can get better results by staying invested over a longer period and protect yourself from market volatility. So, ULIPs with their extended lock-in period are one of your ideal investment vehicles in equity markets to help achieve your long-term goals.

So, if you are in a dilemma over the frequency of your investment in ULIPs, you now know there are enough reasons to go for the monthly option.

Sampat-Reddy

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