Let us investigate it in detail...
1. Stay invested for the long-term – at least 7 years
Says Puneet Nanda, Chief Investment Officer, ICICI Prudential Life Insurance, “Life insurance, and hence ULIPs, should be viewed as a long-term investment. Hence, any person buying such a product must do so with a long term horizon, say 5-7 years at the least, in which case the immediate level of the markets do not make a huge difference.”
Sanjay Tripathi, Head Marketing, HDFC Standard Life Insurance agrees, “There is never a good or a bad time for investing in equity funds of ULIPs, if you are looking to remain invested for a long period (more than 10 years).”
2. Invest systematically
Certified Financial Planner Kartik Jhaveri suggests, “I would say that for any equity investment of less than 7 years, mutual funds are better options. ULIPs are good if you are looking at a time horizon of more than 7 years. And more so, I would recommend a regular investment”
Just like a systematic investment plan is useful for rupee cost averaging in a mutual fund scheme, the same can be applied to ULIPs. Says Nanda, “We encourage our customers to invest regularly, in a monthly/quarterly mode, which works as a systematic investment plan and enables them to reap the benefits of the highs and lows of the market.”
3. Don’t be tempted by a short-term exit option
Apart from the fact that returns from equities even out in the long term, Jhaveri gives more reasons why a ULIP makes sense for a longer time horizon, “In ULIPs, the administrative costs are collected upfront from the first year’s premiums. These costs would be recovered only in a longer period and hence it makes sense to hold on for the long-term.”
While insurance agents may convince you that you can withdraw after a period of three years, Jhaveri advices that its best to stay off that temptation.
How long it takes for charges to be recovered. Even if your fund grew at 10% a year every year, it would still take you anywhere between 3 and half to 5 years to recover your premium amount, let alone get returns. So you would be in a profit position only after that time period. Of course, if your fund grows faster than 10%, the break even would happen faster.
4. Manage your funds according to your risk profile, not market movement
Tripathi says, “For effective planning, one has to understand the current and future financial goals, risk appetite and portfolio mix. Once this is done, the next step is to allocate assets across different categories and systematically adhere to an investment pattern.”
What this means is that if you think you have made enough in equities and want to move to a safer option, you can always switch to a debt option.
Nanda agrees, “The rules that apply to a person – to understand his/her risk profile and time horizon and then invest with a company that they are comfortable with.” Moreover, Tripathi advices that investors should look at their life stage needs before choosing their ULIP.
5. Look at product features
Tripathi says, “For good long-term value, the investors should look at product – features, flexibility and the charging structure, particularly the fund management charges. Investors should also keep in mind the past performance of the fund with respect to benchmark indices and quality of the stocks in the portfolio.”
