Saving with ULIPs during the Corona Virus Pandemic: Things to Know

Investing is a curious exercise where everyone knows the logical conclusion but remain curious about the outcome. This is especially evident during difficult situations, pandemics and disasters. As investors, we want to benefit from all events. At times this short-term objective leads to bad investment decisions. However, with a unit-linked insurance plan, your money and your loved ones are safe.

So, what to do with your money during a pandemic?

The short answer is ‘nothing special’. If anything, you continue investing and try to minimise the risk of your investments so far as possible. However, you should remember that your investments need to stay connected with your goals more than the markets. That is, of course, unless you are investing directly in the markets and your aim is short-term profit.

If you are investing through mutual funds or ULIPs (Unit Linked Insurance Plans) you have fewer reasons to worry. In the short run, your equity portfolio might look devalued but in the long run, it is bound to recover. We have already seen the example of this in the market during COVID's introduction.

Minimise Your Portfolio Risk

You are likely to have multiple goals and, probably, even have multiple investments running at the same time. Given the fact that equity market volatility makes it useful over other investments, you need to continue your equity investments.

However, you also want your portfolio to benefit from the volatility. So, here are a few methods you can use:

• Invest systematically: SIPs or systematic investment plans have been a popular and useful mode of investing in equity funds. SIPs offer rupee cost averaging, leading to a lower average cost of units.
• Use Balanced Portfolio: Always keep about 50% of the savings in fixed income and safe investments. When markets give you the opportunity, you can increase your equity allocation.
• Invest in Managed Portfolios: You can invest directly in pure equity funds or debt funds. However, moving your money around in these funds may increase your tax liability. Also, you will need to put a lot more effort into looking for opportunities and managing the transactions. Investments like ULIPs which give you automated portfolio management options are a much better option.

Building Your Investment Portfolio

You need portfolio management for your investments to exploit market opportunities and safeguard your returns from the market. But, unless investment management is your primary concern in life, you will mostly find the exercise tedious. Also, you may not always find or act on the opportunities.

Instead, you can automate the portfolio management following the principles of wealth building:

• Automate your investments
• Stay invested for long-term

Even when you are investing during the unprecedented pandemic of Covid-19, you should follow these principles for your investment.

Automating Your Portfolio

Portfolio management refers to the exercise of managing asset allocation in a portfolio. So, you can have any or all of the following assets in your portfolio:

• High-Risk: Equity stocks and funds
• Low-Risk Fixed Income: Debt funds and securities
• Inflation Hedge: Precious metals and gold

There are two ways you can automate your portfolio management in these assets:

• Invest in a portfolio management firm
• Invest in an instrument which offers automated portfolio options

If you are starting small and want to invest continuously out of your monthly savings, you will find the second option more suitable. For now, there are only two solutions for regular investors to invest in a managed portfolio scheme:

• Balanced Funds
• ULIP investment plans

Balanced Funds as Managed Portfolio

Balanced funds maintain dynamic equity and debt ratio which can range from 50:50 to 90:10 depending on the market situation. While the funds are managed by professionals with large teams, you have little control over the money.

For example, if you want to withdraw money from a balanced fund for your goal, you have no option other than to reduce your entire holding:

• Your total portfolio value in a balanced fund is Rs. 10 lakhs
• Equity and debt ratio in the fund are 60:40
• You withdraw Rs. 1 lakh from the fund

The money will be pulled out from both your equity and debt holdings. Whereas, ideally, you’d only like to withdraw from the debt part and keep equity untouched.

ULIP Investment Plan as Managed Portfolio

ULIP plans offer far more customization possibilities to you with multiple funds under a single investment option. Canara HSBC Life’s online ULIP plan, Invest 4G has four unique asset management strategies apart from the option to invest in individual equity, debt and balanced funds.

Invest 4G plan offers the following four strategies, all with a different objective:

Apart from automated portfolio management, ULIPs also offer multiple other benefits unique in the investment world:

• No tax liability due to switches from funds within the policy
• All withdrawals after five-year lock-in are tax-free, provided your annual investment in the plan had been below 10% of the policy sum assured
• Bonus units for long-term investors investing continuously for more than 5 and 10 years
• Investment up to Rs 1.5 lakhs is tax-deductible under section 80C

Is ULIP Investment Enough?

With so many features in one place, ULIPs may seem like a one-stop-shop for you. However, more than the instrument, you should ensure that your investments connect to at least one of your financial goals.

Further, you may like to invest in precious metals, especially gold. But you will not need active portfolio management for gold. Inflation hedge assets like gold and precious metal investments should be held on to for a long period. So, their role in a managed portfolio will be nil.

Since most portfolio management activity happens between high-risk equity and low-risk debt funds, ULIPs would be good enough for regular investment.