Have you seen a small kid put coins away in a piggy bank? Does the money he put in the piggy bank grow to a bigger value? For instance, if he puts Rs.10/- today, does it become Rs.15/-? The answer is no, because he is only saving it, and not investing it. This is the difference between making your money earn more money for you and just letting it remain dormant. By investing your money in the right kind of instruments, you let the power of compounding help in multiplying your wealth.
How does the principle of compounding work?
Let us take an example. Assume that you invest Rs.10000/- every year for a period of 10 years at a compound interest rate of 10%p.a. The calculations will be like this:
Principal in Rs.
Interest amount in Rs.
Total amount in Rs.
Thus, it is clear from the above that an amount of Rs.10000/- invested for 10 years at an annual compounded rate of 10% would yield around Rs. 26000/-. This amount would be much higher if the interest is compounded half-yearly. Money has grown in these 10 years, giving it more value to you than if it were just put aside as savings. This is the power of compounding. This power is put to maximum use in instruments like F.D’s, mutual funds and the best among them all; ULIPs
ULIP or Unit Linked Insurance Plan is an investment avenue that gives you the dual advantage of life insurance with market-linked returns. If you invest in a ULIP, the premium that you pay is divided into two parts; one that goes towards investment in market instruments like debt and equity and another part towards providing of insurance cover to the policy holder. In the event that you meet with an untimely demise, your nominee is given the entire Sum Assured. In the event of survival till maturity, you may get an amount equal to the Sum Assured plus any appreciation that owing to favourable market conditions.
ULIP holders, also have the benefits of availing tax exemptions on the amount of premium that they pay every year. Under section 80C, and 80CCC for pension plans, premiums that you pay for ULIPs can be deducted from your taxable income up to a maximum amount of Rs.1.50 lakhs. Also, all withdrawals that you make from the ULIP’s mid-way into the term are exempt from tax. This benefit is not available to other investment avenues like F.D’s, Mutual Funds (some funds like ELSS do provide tax exemption) etc. The premium paid is allocated in various market instruments depending on which type of fund you choose which, in turn, is based on your risk appetite.
ULIP policyholders can switch between various fund options depending on their risk appetite and market outlook. So, for instance, let’s assume you’ve chosen money market fund where 99% of the fund value is invested in Debt. Going forward, you feel that it would be better as per the market conditions that you move your funds to money managed fund, where 34 % is equity and balance in debt, you can switch between the same. Going forward, if your risk appetite increases, you can opt for equity large cap fund, where 99% is invested in equity.
Apart from this, the ULIPs give the policyholders the benefits of life insurance, like surrendering the policy before maturity, enhancing the cover by adding Riders.
ULIPs are an ideal avenue for long-term financial planning.
If you opt for ULIP today, it can help you meet your long-term and future goals; goals like foreign vacation, daughter’s marriage, new car, own start up, etc. These are dreams that you may not be able to fulfil just by saving money as inflation will cut the real value of your money by a fair margin. To fulfil your dreams, you need to let your money earn more money for you for which an ideal vehicle can be ULIP.