Everybody has certain life goals that they want to achieve: buying the house of their dreams, providing a good education for their children, child’s marriage, planning for retirement and many such essential needs can be met by wealth creation in long-term investment products.
Indian investors have historically saved in fixed return instruments but have over the years seen a decline in post-tax returns in many such products, whether they are bank deposits or government saving schemes. Many popular government saving schemes have amount-based caps or periodic interest rate resets which limit the ability to create significant wealth for an investor with different needs.
More importantly with rising scrutiny and tax compliance, an investor needs to consider the post-tax return as well as overall product costs over the investment tenure to evaluate customer level return.
Investment over the long term requires investors to have a diversified asset allocation between Equity and Fixed income to achieve a good risk-adjusted return on their investment portfolio. This portfolio needs to be rebalanced regularly depending on the risk profile and life stage of investors.
One good option for the Indian investors is Unit Linked Insurance Plans (ULIPs) which offer a one-stop solution to help an investor accumulate wealth over time and get closer to accomplishing their long-term life goals.
ULIPs are basically a type of life insurance product that provide the insured with insurance coverage along with the advantages of an investment product. In a ULIP plan, a part of the premium is used to provide insurance coverage, but a substantial portion is invested in market-linked funds of the insured’s choice, such as Equity Funds (large cap, multi cap, midcap, theme-based funds), Balanced Funds and Fixed Income Funds, all of which offer the potential for investment returns over the long term. (Please bear in mind that there are no guaranteed returns from these investment products; all investments are subject to market risk and market volatility.)
Let’s delve a bit deeper to understand how ULIPs can help one achieve one’s long-term life goals:
Disciplined savings: ULIPs have a minimum 5-year lock-in period, and enable one to invest at regular intervals maintaining a saving discipline. A policyholder is ideally required to remain invested for 10 years or more in order to achieve long-term investment goals by letting a higher corpus remain invested for a longer time period.
Long-term wealth: ULIPs provide one with the flexibility to choose between equity and debt funds based on their level of risk tolerance. By taking advantage of market movement, investing in equity ULIP funds may enable one to build a larger corpus that, over time, outperforms inflation. Another advantage of regular equity investment through ULIP is that it endures various economic cycles and averages out any losses resulting from transient market fluctuations. When looking at ULIPs’ long-term performance, with a 10-year investment horizon or more, ULIPs have consistently produced positive returns. However, investors should note that this analysis is of historical returns and past performance may not be an indicator of future returns.
Compounding benefit: The power of compounding is simply the result of an asset generating earnings and those earnings producing further earnings. Investors should be aware that assets may not generate earnings in all years, and therefore, staying invested for the long term gives one a better opportunity to benefit from the power of compounding as this allows the funds’ Net Asset Value (NAV) time to grow and tide over market volatility. To achieve long-term investment objectives, one should stay invested in ULIPs for at least 10-15 years or more.
Tax-planning instrument: ULIP investments result in tax savings as well. The premiums and the returns from ULIPs are tax-free under Sections 80C and 10 (10D) of the Indian Income Tax Act, 1961. However, with the announcement of the Budget last year (2021), the maturity profits of ULIPs are subject to taxation in certain circumstances. If the total premium paid exceeds Rs 2.5 lakh annually, the maturity benefit will be categorized as Long-Term Capital Gains (LTCG) and taxed appropriately.
In a nutshell, ULIPs can prove to be a sound option when it comes to choosing a financial tool to help in achieving one’s long-term wealth goals.
(By Sameer Bansal, Chief Distribution Officer, PNB MetLife)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.