No Shortcuts to Financial Security – Plan for the Future

It in interesting to realize that one of the most crucial decision once a person starts earning is how to save and invest in the right investments for the future, which often is clouded and difficult to visualise in the current setting. Unexpected incidents happen a lot, and it is needed to be aware and protected against the worst. Interestingly, even though everyone realizes its importance, not everyone tries to be aware of how to make such a decision critically and with a detailed understanding of the background and its issues.

Having a long term vision helps, and is of critical importance.

While technical awareness may be difficult to develop for professionals who are not from the financial services domain, some basic food for thoughts can be easily nurtured when the need for investment options is realized. A lot of professionals hence use shortcuts for financial planning without having a detailed long term thought. While such short term ploys may help to address immediate needs, they become dangerous when the core needs of life are not planned for properly in advance. So what are these basic things that one must keep in mind when exploring long term potential investment options, even if most investment options are managed by expert fund managers?

Most investors agree that investment options should provide a person is flexibility and coverage of different essential things like insurance. The need for life insurance for every person cannot be over stressed at any point of time. However, having different investments made, one solely for life insurance and another solely for investment purpose becomes stressful for many retail investors. This is where ULIPs come into the picture. A Unit Linked Insurance Plan (ULIP) is a financial instrument designed which unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan. No headaches for separate instrument for the investor. In a ULIP, a part of the premium paid is used to create an insurance cover to the policy holder while the remaining part is invested in various equity and debt schemes that will generate higher returns on the investment. Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and risk appetite, keeping in mind that risk is proportional to the expected returns of any instrument.

Now such ULIPs should offer flexibility to the investor to change the proportion of amount planned at the time of investment, based on events in life like marriage, initiation of a family, birth of the first child, and so forth. The need for protection against the darker shades of life changes as the story unfolds and hence flexibility to change the proportion of investments versus insurance as and when needed is crucial. Further flexibility should also be provided to invest such an amount as is possible for a person, when he manages to earn and save more.

Next is the consideration of returns against such investments. Individuals have different risk appetites and needs in different stages of life. It is crucial to have a plan that aligns its exposure to debt and equity such that the returns planned and the exposure to market risks are in line with the investor’s need.

Also important is to have a plan that accommodates the changing phases of the economy, and creates wealth through systematic investments. When the market prices go high, the investor ends up buying fewer units when prices are high, and more units when prices are low, due to fixed monthly investments. Further, such investment plans need to have a long term focus to utilize the growth of an economy to the maximum potential while hedging macro economic risks.

Finally, another major focus should be on creating tax benefits. As the economy is booming, more and more professionals are reaching the 30% income tax bracket. ULIPs provide a way to save on tax benefits on maturity and on premiums paid. This becomes significantly high for high net worth individuals.

In line with these thoughts, when one explores the potential investment options, one of the new products that draws attention is that of Exide’s ULIP plan. Exide Life Insurance Company Limited (formerly ING Vysya Life Insurance Company Limited) started in 2001-02 and today serves over 10 lakh customers across India and manages over INR 8800 crores in assets. This ULIP plan has a 5 pronged benefits which addresses all the needs which have been discussed earlier from flexibility in investment options, to tax saving benefits. Further it helps the investor to ride the fluctuations in the market economy by riding on the systematic investment schema whereby investments capture and mitigate market risks. Further for the long term investor, this investment plan offers major loyalty benefits at the end of 10th,15th and 20th policy years and thus differentiates itself from most other ULIP products very strongly. Investment flexibility is provided both in the monthly investment amount, the ratio of the debt:equity bundling, and the amount investable in insurance. This plan also offers tax benefits on premiums paid under section 80c and on maturity amounts under section 10(10D ), and thus suits the investment needs of middle and high income group investors.

Author: Kar

Dr. Kar is in the Information Systems & Management area in one of the top QS Ranked universities of Asia/world. He has extensive experience in teaching, training, consultancy and research in Indian Institutes. He has published over 75 high impact research papers with hundreds of citations as per Google Scholar. He has also authored/edited a number of books. He is the Editor and Founder of Business Fundas. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.