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

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

Savings with ULIP

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 OBC 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:

Save Tax

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.

Speak to an insurance specialist now!

FAQs

In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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