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Life Insurance - Why Ulip Holders must Stick to their Strategy

27-Sep-2012

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Many unit linked insurance plan (Ulip) holders are having a tough time sticking to their investment choices, say life insurance company officials. For example, many of those who have invested predominantly in equities were looking to switch to debt fund options because of choppy market conditions.
However, now with the government announcing a slew of big-ticket reforms and the benchmark indices moving upwards in the past few days, some of the investors seem to be doing a rethink.

�The sentiment over the past couple of quarters has not been positive, which is reflected in policyholders preferring less-risky investment options like debt or liquid funds. This fluctuates with the performance of the stock market. Over the past couple of weeks, as the Sensex has moved up, we have noticed more customer requests for fund value and switches to equity funds,� says Subrat Mohanty, executive vice-president and head, strategy and product at HDFC Life.

STICK TO YOUR STRATEGY

Sure, there is a perceptible change in the sentiment since last Friday. This is despite the Reserve Bank of India (RBI) holding the policy rates on Monday. However, the reduction in the cash reserve ratio (CRR) and the dovish statement clearly indicates that it is only a matter of time before the interest rates start coming down. This means your fixed deposits and other debt instruments won�t return as much as now. That may sound like a case for investing in equities, but it is not necessarily so. It may sound tempting to incorporate current trends into your investment decisions to reap some gains in the short-term.

However, it may be counterproductive in the long run. That is why experts advise you to stick to your original asset allocation plan all the time. �To build a well diversified portfolio, a policyholder has to have exposure to all asset classes � equity, debt and cash. To achieve one�s long-term financial goals with least turbulence, asset diversification is necessary. A policyholder needs to assess the amount of risk he/she can take and balance that against their return aspirations,� says Sashi Krishnan, chief investment officer at Birla SunLife.

�The most important factor that investors should consider while deciding fund options is the tenure of investment. If the investment is for 20 years, they should go with 100% equity options without any apprehensions. However, if they are looking at an investment for only 5-7 years, then they should look at a mix of equity and debt,� says Raghvendra Nath, managing director with investment advisory firm Ladderup Wealth Management. Also, remember that insurance should never be bought from a short-term perspective. Oh, yes, we are discussing Ulips here.

STRATEGY FOR EQUITY INVESTORS

LadderUp�s Raghvendra Nath feels that those who are currently invested into equity options should stay put as chances of stock markets turning around in the next five years is very high. �Even investors who are going for new policies should seriously consider the equity option. In any case, the charges in insurance products are pretty high. Equity investments can offset these charges to some extent by giving higher returns.

Moreover, insurance is a very long-term investment proposition. And, equity has been the best asset class without doubt for the long term � that is, 8-10 years,� he says. �An analysis of the rolling returns for equity over 5-year, 10-year and 20-year periods shows that equity returns have been positive over all time horizons. The 20-year rolling return, as analysed for the last 13 years, indicates that it has never fallen below 15.9%. Long-term investment in equity thus yields handsome returns,� adds Sashi Krishnan, chief investment officer, Birla SunLife. If you are still sceptical about directing your entire premium into equity options, you can adopt a staggered approach.

�Policyholders who are worried about volatility in equity markets may invest their savings in debt or liquid funds. They can then gradually shift their money into equity depending on the existing market conditions,� adds Niraj Shah, senior vice-president and head, product management at ICICI Prudential Life. Fund options are offered by life insurers essentially in various combinations of equity and debt. Broadly, these can be classified into entirely equity, fully debt and balanced (mix of equity and debt), with several variations. You can switch from one fund option to another based on your assessment of the market situation. While some insurers charge a fee if you exceed the cap on number of free switches in a year, many have now done away with such ceilings.

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