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What is the Effect of Recurring Investment Strategies on ULIP Returns?

  3/2/23 7:39 AM

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The full form for ULIPs is Unit-Linked Insurance Plans. These plans are a great way to build future wealth while gaining life coverage simultaneously. However, ULIP plans need suitable investment strategies on your part to ensure better returns. To maximise these returns, it is very important to understand and leverage the power of compounding. Compounding is the process of reinvesting the returns from investment to generate greater returns over time. The longer you invest, the greater your wealth accumulation. As a result, investing early for long-term goals allows your money to compound and expand.

For example, for the first instance where the returns are calculated as simple interest on the principal amount of ₹1 lac at 10% interest for 10 years, the total amount after 10 years would be:

Total amount = Principal + (Principal x Interest Rate x Time) = 1,00,000 + (1,00,000 x 0.10 x 10) = 2,00,000

For the second instance if the returns are calculated based on compound interest, the principal amount is revised every year as the returns until then are also included in it. The formula for compound interest is:

A = P x (1 + r/n)^(n*t)

where A is the total amount, P is the principal amount, r is the annual interest rate, n is the number of times the interest is compounded in a year, and t is the time period in years.

For this instance, the interest is compounded annually. Therefore, n = 1, r = 10% or 0.10, and t = 10 years. The formula can be simplified as:

A = P x (1 + r)^t = 1,00,000 x (1 + 0.10)^10 = 2,59,374

Therefore, the amount obtained through compound interest is ₹2.59 lacs, which is significantly higher than the amount obtained through simple interest of ₹2 lacs. This is because in compound interest, the interest is added to the principal amount every year, and hence, the interest earned in the previous years also earns interest in the subsequent years.

You can benefit from the power of compounding by purchasing a ULIP plan. The 5-year lock-in period and long-term investing focus of ULIPs provides ample opportunity for your assets to compound and expand and your wealth to compound over time.

One way to ensure compounding is to adapt recurring investment strategies. Recurring investment strategies can be great options for ULIP insurance plans. A recurrent investment is an activity in which you invest a set quantity of money in a specific investment plan. The plans that allow for regular investments, like ULIPs, also enable you to accumulate money at your own pace. let’s take a closer look at these strategies and how they can be applied to ULIPs.

How Are Recurring Investments Beneficial For You?

Before you learn more about ULIP investments and their connection to recurring investment strategies, it is better to look at how these strategies benefit you in the first place. Here are a few points that you can consider:

  • These investments are easier to track and manage. You only have to invest a fixed sum each month in any plan that suits your needs. You can do this as per your risk appetite.
  • You can build up your savings with recurring investment strategies, which help boost your savings at compounding interest rates. The small amount you invest every month may become a sizable corpus in the future.
  • Recurring investment avenues like debt or equity funds may also help you scale up investments faster than conventional routes like PPF or FDs.
  • You can also expect tax benefits if you invest in suitable instruments with recurring investment strategies. You can get deductions under Section 80C (up to ₹1.5 lacs) on investments like ELSS, NPS, ULIPs, PPF, and more. For example, if you regularly invest in any of these investment plans, you can claim a deduction against the premiums or investment amounts you pay toward them. Compared to a lumpsum investment, this allows you to lower your taxable income by as much as ₹1.5 lacs every year, for as long as you are investing and these tax deductions are applicable.
  • You can also benefit from rupee cost averaging, especially if you deploy money through SIPs (systematic investment plans). When you keep investing a fixed amount at differing NAVs (net asset values) of funds, it may lead to the average cost of units reducing over time since you will get more units at lower prices when the markets are down and lesser units at higher prices when the markets are up. Eventually, you can achieve a lower per-unit cost for your funds than the NAV or average price. Hence, the portfolio will always stay profitable across various market scenarios, including stagnant circumstances.

Now that you know about recurring investment strategies and how they can help you, here is a closer look at deploying them for your ULIP policy.

ULIPs and Recurring Investment Strategies

Before choosing a suitable ULIP for your portfolio, you should first understand the process of deploying recurring investment strategies for these insurance plans These policies have provisions that enable recurring investments. Although you can invest on a monthly, quarterly, or annual basis as per your specific preferences, monthly investments would be your ideal recurring investment strategy. That way, you can invest a fixed amount monthly in ULIPs while getting recurring investment benefits like rupee cost averaging.

Furthermore, some insurance companies offer additional services so that your fund navigates through the ups and downs of the market smoothly. Some ULIPs offer a STP (systematic transfer plan) based on Life Stage and Duration (they manage your funds according to your life stage). This technique ensures that money is transferred from an equity-oriented fund to a debt-oriented fund as your age increases and the remaining policy term decreases, reducing the associated risk over time.

Here Are Some Tips For Maximizing Your Investments And Returns:

  • Always begin early if you are investing to ensure the best long-term returns. You should start investing in a wealth creation ULIP at the earliest. There is no ideal time frame for starting your investment journey.
  • Choose an investment strategy for the long haul and one that you are comfortable with. It can be a recurring investment strategy as well.
  • Diversify your investment portfolio as much as possible. It will help you reduce risks and enhance the possibility of earning higher returns.
  • You can choose ULIP plans tailored to your future goals regarding fund choices. You can switch across funds, depending on your risk appetite.
  • Be consistent in your investment approach while maintaining requisite discipline. Be patient and wait for your returns to grow over time.
  • A long-term approach will always help you reap the highest rewards in this case, particularly with ULIPs.

Along with a recurring investment strategy for Unit-Linked Insurance Plans, you should always have a definite investment objective at the outset. You need to have a clear picture of what you want to achieve to tailor and manage your investments toward achieving the same. Hence, pay attention to this aspect while investing in a ULIP.

Now that you have understood the potential of ULIP returns if regular investments are made, you can proceed to choosing the suitable ULIP for your needs. Note that to fully realise the power of compounding, it is crucial that you have a long investment horizon. ULIPs are best utilised as long-term wealth-creation instruments, so start your journey today!


Swati Tumar - Travel & Finance Writer

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.

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