Unit Linked Insurance Plans (ULIPs) are amongst the most favoured investment instruments for investors who aim to create long term wealth. ULIPs bring a host of advantages that include investment, life protection and tax savings. If you are apprehensive of directly investing in the stock market, ULIPs can provide an opportunity to do just that but through systematic investment along with lower risk, better returns and tax exemptions.
Let us see how you can benefit from systematic investments and tax savings with ULIPs.
Systematic Investments
Systematic Investment is a method of spreading your total investment into smaller amounts over a period of time with regular intervals. The frequency of investment could be weekly, fortnightly, monthly or quarterly. Instead of paying a lump sum amount in one go, you have an option to divide the payment into smaller installments.
When you choose a systematic investment mode to invest your money, it is known as Systematic Investment Plan (SIP). You can say that a SIP is similar to a recurring deposit.
So, you must understand that SIP is not an investment instrument like ULIP, rather it is one of the methods or ways to invest in ULIP.
Why systematic investments with ULIPs?
• They instil a habit of saving and committed disciplined investment.
• They also abate the risk that comes with short term market volatility since the infusion of investment is divided over a period of time instead of one-time bulk payment.
• They give you the advantage of rupee cost averaging, which levels the highs and lows of market fluctuations. When the Net Asset Value (NAV) is high, you will get fewer units. When NAV is low, you get more units. Over a period of a few years, this evens out.
Let’s take an example.
Option 1 : You invest a lumpsum amount of Rs100 to buy 50 units@Rs2 each in January in Fund A.
Option 2: You opt for systematic investment in Fund B. That is, you decide to buy units in two instalments. So, you invest Rs50 to buy 25 units @Rs2 each in January. Then, again, you invest Rs50 in March, but the unit price has now reduced to Rs1 each. So, instead of getting 25 units, now you are getting 50 units at the same price.
Comparison: By March end, you own only 50 units in Option 1, while you own 75 (25+50) units in Option 2.
- They are affordable as you don’t have to empty your pocket in one shot, rather you can methodically fit them into budget to avoid financial burden.
- They allow you to leverage the power of compounding interest. So, you get to reinvest your returns and earn more returns, thereby increasing your wealth over a period of time. You can explore the power of compounding with the ULIPs from ICICI Prudential.
Tax benefits
ULIPs score brownie points here too. Not only are the investments made in ULIPs are exempt from Section 80C, but the income therefrom such as capital gain or maturity benefit is also given an exemption under Section 10(10D) of the Income Tax Act.
In fact the high maintenance charges on these funds get balanced out to quite a certain extent by these exemptions. Another way of beating the charges are loyalty additions and wealth boosters.
Simply put, if you have made an investment of Rs100 in ULIP, then you can claim it as deduction from your total income under section 80C in the year of investment upto the maximum limit of Rs.1,50,000. Further ahead, say you earned Rs20 on your fund, then the same will be claimable under section 10 (10D) which you will directly exclude from your total income.
ULIPs give you an opportunity to invest in smaller amounts, systematically and with discipline. They also encourage you for compulsory investments as there are associated tax exemptions. The benefits of systematic investments and tax benefits combined, ULIPs make ideal wealth creation instruments.
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