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3 reasons why ULIP plans are one of the preferred choice for equity investments

July 18, 2018

Inflation is the biggest factor you need to watch out for while investing. This is because inflation eats into your savings over a period of time. In a high growth economy like India, savings have to find their way into instruments that offer to take on inflation. It is proved empirically by many over the years that equity market returns outperform inflation over the years. The equity option in a Unit-Linked Insurance Plan (ULIP) is worth a look. Here are three reasons why:

1. Long-term Investments

The stock market can be quite volatile in the short term. In some cases, you can see wild price movements even during a single trading session. That's why it can be quite risky to bet on stock price movements in the short term. But when it comes to long term investing, equities has generally managed to outperform other asset classes, although it comes with intermittent volatility and market corrections. Historically, the BSE Sensex has been known to offer the highest returns to investors compared to all other investment avenues. So, if are looking for better returns in the long term, equity investments may be the way to go. You can consider investing in Unit Linked Insurance Plans (ULIPs) for long-term goals (10 years and more) because ULIPs have a 5 year lock-in period which will encourage long-term investments. Further equity oriented ULIPs have the potential to offer higher returns over longer time periods.

2. Goal-Based Investments

Many people put money in equities and wait for good returns. That's one way to go about it but there is a better option: goal-based investment planning. Create a list of long term goals that you want to achieve in say, 10, 15 or even 30 years down the future. For example, you may want to create a corpus so that your daughter can study abroad in ten years or you may want to gift a house to your son at the time of his wedding. In addition to these goals, you may also want to create a substantial amount of corpus for your retirement.

All these are examples of long term goals. By identifying specific long-term goals, you can allocate investments towards these different goals. And for achieving these goals, ULIP plans are a great option. You can invest specific amounts of money each month based on your financial requirements and risk capabilities. By investing steadily and giving time for your money to grow, you can create a large corpus of money to achieve your life goals. For example, if at the age of 40, you invest Rs 10,000 each month in equity-linked ULIPs, you may earn around Rs 60 lakhs (assuming a 8% annual rate of return) or Rs 37 lakhs (assuming a 4% rate of return) by the time you retire, say at 60. But if you started investing the same amount each month 10 years earlier, you might create a corpus of Rs. 1.28 crore (assuming a 8% annual rate of return) or Rs 55 lakhs (assuming a 4% rate of return). This is possible through the power of compounding. And in addition to getting a corpus when the policy matures, if anything were to happen to you, your family still gets insurance cover to achieve their life goals.

3. Utilise the switching facility

As you grow older or near the maturity of the insurance policy, you need to spread your investments over different asset classes. This is to minimize your risk and protect your investment capital. For example, imagine you are investing for your retirement fund. In the beginning, investing a major portion of your fund in equity is a good idea. But as you near your retirement age, it is better to gradually shift your funds from equity to debt, which are safer investment avenues. This is to avoid any unexpected losses in case of a market crash. This is extremely easy when you invest through ULIPs as it offers a switching facility. Here, you have the option to switch between different equity funds to debt funds (or vice versa) at any point in time. This feature protects you against market risks and helps you optimize your returns.

When you invest in equity, the performance of your fund depends on stock market results. So, if you have a risk taking appetite, you can invest in equity-linked ULIPs to reach your financial goals.

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