In the investment circles, the benefits of investing early in life have been repeated over and over again. By the time most of us realize that we should start saving and investing, we find ourselves surrounded with responsibilities and wonder if we have wasted too much time to buy good investment products. The good news is that it is never too early or too late to start investing. The key lies in buying the right investment product.
The primary mantra of investment is that there is no fixed product that can suit all types of investors and/or all needs. You must take your financial goals and risk preference into consideration before investing. Also, if you are starting your investment journey relatively later in life (35+ years), then choosing the right investment product is of utmost importance.
Some factors to consider if you are starting investing later in life
Before you begin looking at investment products, ensure that you are in a financially comfortable place. This means that:
You have a positive cash flow – In other words, you have an annual budget with a clear understanding of your expenses and have some amount left over after paying for all of them. Just in case your cash flow is zero (you are spending all that you are earning) or negative (you have loans or credit card debt to manage regular expenses), then you must figure out ways to either increase your income or cut your costs.
You have an emergency fund – This fund should be able to take care of at least 6 months of your costs.
You have insurance (life, medical, home, etc.) – Insurance acts as a safety net to help you manage unplanned costs without burning a hole in your pocket.
Once you have taken these factors into consideration, determine your investment goals. This can be creating a nest egg for your retirement years, creating a fund for your world tour, etc. Being a late starter, most experts would recommend that you do not expose yourself to a lot of high-risk investments like equity. However, every investor is different and you must choose the investment products based on your risk tolerance.
According to the WHO data, the average life expectancy in India is around 67 years for males and 70 years for females. So, even if you are starting investing at 35 or 40 years of age, you can still achieve your investment goals with the right choice of investment products.
Which Investment Products Should You Consider?
An investment advisor is the right person to give you a concrete answer to this question. However, we recommend that you look at investment avenues which offer an opportunity to earn good returns and sync with your investment plan. One such product is a new-age Unit Linked Insurance Plan (ULIP).
In the last one year, there has been significant surge in the demand of new online ULIPs that promise to be low cost with zero commission and low charges. In its attempt to become more customer-centric, the new-age online ULIPs have either reduced it to minimal or completely removed the charges, except the fund management cost which is also charged in the mutual funds. Thankfully, IRDAI has even mandated fund management charge of 1.35% or less on new age ULIPs.
Reasons Why ULIPs Can Be a Great Choice
One of the greatest advantages of ULIP is that it is the only investment product that offers maximum transparency to its customers as all expenses are clearly stated beforehand. The insurers have now come up with the concept of 4G ULIPs which are basically zero-commission products attached with loyalty bonus and additional allocation opportunities. Moreover, the fund management charges in the 4G ULIPs available in the market today are as low as 1.35%, and for the benefit of investors, the products are structured in such a manner that they make ULIPs highly competitive in comparison with mutual funds. The performance of 4G ULIPs is better than most other investment products in terms of returns and charges. Some other celebrated features that make ULIPs better than the rest include zero policy admin charge, zero premium allocation charge and most importantly, mortality cost that gets returned to the customer on maturity of the plan.
Most importantly, the exclusion of long-term capital gains (LTCG) tax in the Union Budget has made ULIPs one of the favoured investment instruments amongst investors looking for higher returns. As per the government regulations, the premium paid up to Rs 1, 50,000 against the investment in ULIPs is tax free under the Section 80C of the Income Tax Act, 1961. Also, the interest earned on investment in ULIPs is completely tax-free. However, in case of mutual funds, the customers have to pay 10% tax on the interest earned if the amount exceeds Rs 1,00,000.
How to Invest in ULIP?
Basically, there are two different ways of investing in 4G ULIP plans available in the market and the consumers have the prerogative of choosing one as per their convenience. While the first one is annual premiums, the second one is systematic investment plans. ULIPs work on the concept of ‘rupee cost averaging’ under which the cost at which the investor purchases the specified units of a fund is averaged. As per the market experts, ‘rupee cost averaging’ is one of the finest ways to minimise the guessing game as the investor invests a fixed amount of money at regular intervals regardless of the market condition.
With this process in place, it is made sure that the investors buy more units when the markets are low and lesser units when they are high. For people who cannot afford to invest a lump sum amount, the insurers give the option of going with the monthly premium payment method. Under this mode of payment, the market fluctuations are averaged out against the payment made.
No doubt, ULIPs are one of the best investment options available keeping in mind the current market conditions. The ULIPs allow the investors to shift between equities and debt (irrespective of Annual premiums or SIP), even during the first 5 years which is also the compulsory lock-in period. You can use this benefit to your maximum advantage by switching funds based on the on-going market scenario. With their amazing features like low-risk and high-returns, and easy switch options, ULIPS have today become the right choice of investors who worry about market risks and wish to secure investments. No wonder, ULIPS are an ideal investment solution for the new generation of investors. And remember, it is never too late to start investing. However, ensure that you plan well and buy the right investment product.
Below is a product comparison of some of the best ULIP plans available in the market.
Updated as on 21 Feb 2019; Source: www.policybazaar.com
(By Santosh Agarwal, Head-Life Insurance, Policybazaar.com)
(Disclaimer: These are the views of the author. Readers are advised to consult their financial advisor before investing in any product.)