Long Haul Pays Better

Markets can be characterized by their ups and downs, and that makes investing in them lucrative and devastating – both at the same time – depending on the method of investing. This is especially the case with retail investors.

Today, it is true that the financial markets are going through a crisis period. However, this is not the first time. The worst period for the Indian stock market was between August 1994 to July 1999, following the failure of many finance companies and interest rates rising on corporate bonds to more than 16 per cent per annum even for the best borrowers. The Non Performing Assets (NPAs) for some of the banks were then around 20 percent of their loan portfolio. The current situation is far better than that.

In one of its worst falls, the Sensex had slipped 50.47 per cent between April 1992 and January 1994. It fell for the longest period of 59 months between August 1994 and July 1999by 38.74 per cent. Despite such falls, the peak index by December 2007 was at 20,287. Also, despite such severe fall in markets in the past, the annual compounded return on systematic investment of Rs 10,000 per annum for 15 years has yielded an average annual return of 16.14 per cent for India, based on history since 1979. Thus, investors who stayed invested through the low reaped the benefits of long-term investing in the markets.

Life insurance is all about long term financial protection and asset-building. With its unit-linked plan (ULIP) product category, it offers all categories of investors to reap the benefits of long-term wealth creation. This is in addition to providing them the benefit of financial protection to the family, in the event of an unfortunate occurrence, especially in times of market crashes and unemployment.

Over medium and long term tenures (periods over 6-7 years), ULIPs provide better overall potential for returns than any other market-related instruments. The cost-return comparison between ULIPs on the one hand and these other instruments and separate life protection on the other hand indicates a better performance for ULIPs.

Some ULIPs also offer special loyalty additions over longer investing periods towards the maturity of the policy, thus ensuring that the fund value grows at a pace faster than the returns generated, helping the customer beat the pressure of inflation and short-term market volatility. While it is generally accepted that equity investments provide higher returns over a longer holding period, customers may prefer to shift funds towards more conservative options such as liquid (money market) funds or debt funds, especially in times of financial turmoil.

ULIPs also provide flexibility to decrease protection (to limits specified as part of the ULIP guidelines) over the term of the plan, as the protection needs of an average customer tend to reduce over his/her lifetime. ULIPs also provide an option, in some cases, to increase the sum assured within one product through term riders (subject to underwriting norms). Flexibility in premium payment is another benefit provided by ULIPs.[PAGE BREAK]

ULIPs also provide an option to 'enhance' the kitty using top-ups which add to the existing fund value. This flexibility to add, reduce and shift funds within the same policy is unique to ULIPs. From a tax perspective, the maturity proceeds from ULIPs are generally tax-free.

The different ULIPs in the market provide an avenue to combine insurance and investment benefits to suit the unique needs of various customer segments.

While on the one hand, the market favours the long-term and disciplined investor, it is important for investors to also evaluate the business stability and grounding of the life insurance company and its promoters. It is important to study the soundness of the insurer, in good times and in volatile times such as these. Thus, the key to emerge smiling out of a volatile market situation is to remain invested in the long term, with a sound market-linked product from a stable business house.