In the recent years, new-age Ulips have attempted to change this perception by promoting the mantra of staying invested for wealth creation.
By Anup Seth, Chief Retail Officer, Edelweiss Tokio Life Insurance
They say, ‘The big money is not in the buying or selling, but in the waiting!’
The art of waiting is difficult to master. But, when wealth creation is your objective, waiting is the most crucial factor for its success. While the financial tool you choose is important, what matters equally is how long you stay invested in it. More often than not people believe waiting is detrimental to their investment. However, constantly monitoring, and intervening does not necessarily pay off. In some cases, it can lead to disaster.
In the recent years, new-age Ulips have attempted to change this perception by promoting the mantra of staying invested for wealth creation. The category, especially, has found higher relevance in the e-commerce era. The experience provided by the likes of Uber, Amazon and more has changed customer expectations. They now expect easy access through a simple, uncomplicated tool. Equipped with the right mix of flexibility, transparency, low-cost structure, and ease of on-boarding, these Ulips are fulfilling every new-age customer wants. No wonder then Ulips have fast become a lucrative investment option for meeting long- or short-term goals.
Another factor that has contributed to their popularity is the dampened risk appetite in light of the volatile market movements. Customers are looking for financial tools that help them keep their wealth insulated from any short-term, and intermittent shocks.
Here are some reasons why Ulips should be your preferred choice for wealth creation:
i) Pure retail focus:
Ulips are an ideal option for retail investors. Most other investment vehicles see commingling of funds from institutional investors, HNIs, and the retail investors (who typically have smaller investments), and are susceptible to large swings in flows and therefore, the fund size. With a focus on acquiring bigger institutional or HNI customer, the investment mandate is focused more on smaller term strategy and assigns higher weightage on short term performance. Moreover, significant volatility in the AUM requires a sizeable allocation to liquid assets. These factors impact the longer term performance and can cause a dent in the returns for the retail investors.
The new-age Ulips do not face this design flaw and require the customer to lock-in their funds mandatorily for a period of 5 years. These 5 years allow the money to grow and fully provide the advantages of compounding.
ii) Flexibility of asset class:
The current tax structure rewards a customer who stays with the same fund or asset class for a longer period. It does not account for the fact that a customer’s risk appetite, and expectation of returns can change over the course of time as per market momentum. So, a long-term customer who wants to shift from one security or fund to another has to forego a tax. A Ulip, however, accounts for this flexibility and does not have any tax implication.
A new-age Ulip offers diverse investment options – equity, debt, balanced funds and sub categories within each of these fund classes. It provides freedom to switch between these funds without any cost to generate better returns as many times as the customer chooses without any additional charge or tax implication. In fact, some products offer an option to automatically rebalance asset allocation as you grow older. As the age increases or policy nears maturity, the plan shifts asset allocation from riskier assets to conservative ones to preserve investment value without any tax implication.
iii) Protection throughout your life:
Ulips are designed with inherent benefits of protection and enable you to secure loved ones as per your growing needs. For instance, some Ulip plans allow you to include your spouse, and your children (as you progress through these life events) into your existing policy.
Whole-life option in Ulips is also a suitable tool for those planning their retirement. These products help you build a big corpus, with the much-needed cushion of protection. These instruments allow you to balance your risk appetite as per your growing age. Meaning, some Ulips in the market automatically shift your allocation to funds that carry lower risk.
iv) No tax outgo:
All the benefits of the ULIP investment strategy listed above are sufficient to secure the vote of confidence of retail investors. However, the most impressive benefit of ULIPs is no tax liability at the time of redemption. This benefit is massive as the longer you stay invested, the higher is the wealth creation potential of your corpus.
In contrast, the longer you stay in any other investment vehicle the more your tax increases in tandem with the investment value.
There is no doubt that the new-age Ulips are designed to help investors effectively combine their goals of protection and wealth creation. As customer expectations evolve in the ecommerce era, both from the product itself and the online experience, Ulips will certainly keep the flag flying high for the insurance sector.
(Disclaimer: This is the personal view of the author. Readers are advised to consult their financial advisor before making any investment)