It has been established time and again that in the long run equities outperform most other asset classes. Yet, rapid changes in stock prices, upwards or downwards, may tempt investors to exit the market and deviate from their long-term financial plans. Ulips are long-term products and help instill discipline in policyholders to stay put for long periods. They disregard the short- to mid-term market noise and see their investment grow over the long term.
With multiple fund options to choose from, Ulips allow policyholders to take the first step to investing by creating the space for easy asset allocation. This helps them divide the investments between asset classes such as equities, cash and money market equivalents. This is the principal reason for diversifying investments across different asset classes—to minimise the risk of a portfolio. There are also funds that work on the automatic asset allocation formula, which offers investors a pre-defined exposure depending on their age. Investors can diversify into more than one asset class—equity and debt—with optimal costs in a single product.
This also takes care of the investment risk, as an equity investor can include debt to stabilise his portfolio, or a risk-averse investor can dip a toe into equity to better his returns. Conventional wisdom says one should buy when the markets dip and sell when they soar. But it is very difficult to make the right decision at the right time, especially in a volatile market.
Ulips allow policyholders to switch investment categories; a person can move from a debt-oriented plan to an equity one, or a mix of both. Debt funds offer fairly consistent returns, but you also lose the potential to create wealth over the long term by investing in equities. However, the inherent risk of equities can be a deterrent. To get the best of both worlds, you can switch from one asset class to another. This asset rebalancing ensures that investors stay in the market through volatile periods and benefit from long-term investing as well as asset allocation.
—Pranav Mishra is Sr V-P & Head (Products), ICICI Pru Life Insurance