Ritu just received her first paycheck; she listens to her father’s advice and decides to invest the money.
She researches for investment options online and then stumbles upon Unit Linked Insurance Plans.
ULIP provides you with dual benefit: life insurance along with investment.
You have the option of investing in a number of quality investments like shares and bonds. Furthermore,
ULIP is flexible; investors with a high-risk appetite can primarily invest in equities while those who prefer minimum risks can invest in a combination of money market investments, equity, and debt. The major advantage of a ULIP is Rupee-Cost Averaging.
Sanjana then decides to know all the details about ULIPs so she contacts a financial advisor online.
Sanjana: Hi, I wanted to know the benefits of ULIP. Can you help me out here?
Financial advisor: Of course. It’s very simple; while traditional investments work on the principle of averaging, ULIPs work on rupee-cost averaging. Albert Einstein once said: ‘Compound interest is the eighth wonder of the
world.’ I believe that ULIP is the best example of this eighth wonder.
Sanjana: Now you have got me intrigued.
Financial advisor: Let us assume that you want to buy 10 kilograms of apples every month.
Now, in December the apples were priced at Rs. 20 per Kg; hence, your total expense is Rs. 200.
However, for the month of March, the apples are priced at Rs. 40 per kilogram; hence your total expense for the month of March comes to Rs. 400. So the average price per Kg comes to Rs. 30.
Regular investing works on this principle.
Sanjana: That was easy. What is rupee-cost averaging?
Financial advisor: Let’s assume that you have a fixed budget; i.e., Rs. 200 to spend on apples every month. In December, apples are priced at Rs. 20 per kilogram. Your budget allows you to buy 10 kilograms.
In March, since the apples are priced at Rs. 40 per kilograms, you are able to buy only 5 kilograms with your budget of Rs. 200. What is the average price that you paid for each kilogram of apples?
Sanjana: That’s simple; it’s the same as the above case: Rs. 30
Financial advisor: No, that’s incorrect. You bought 15 kilograms of apples over the course of 2 months (10+5= 15)
Your total cost came to Rs. 400 (200+200 = 400). Hence, your average price per kilogram of apples is
Rs. 26.66 (400/15). In the first scenario, your average price per kilogram of apples is Rs. 30 whereas in the second scenario, the rupee-cost average price per kilogram of the same apples is Rs. 26.66.
This is known as rupee-cost averaging; ULIP is based on this principle.
It is an approach in which one invests a fixed amount of money at regular intervals, ensuring you can buy more shares when prices are low and lesser when it’s high. You can’t turn in to a millionaire overnight but you can be assured that a considerable amount of wealth is accumulated over a period of time.
ULIP takes the route which involves accumulation of wealth. Rupee cost averaging along with the power of compounding goes a long way in multiplying your savings.
ULIPs help you develop the habit of saving money. Moreover, they give you a large sum of money at maturity, which you can use for your dreams such as buying a new car, your retirement; or a safe fund for any contingencies.
Sanjana: This has been very intellectual; thank you!