Choosing an appropriate and beneficial investment tool can be difficult as every financial avenue has its own pros and cons. But as an investor, you have to know that each instrument either has risk attached to it or a long-term investment factor. Thus, quick returns with zero risk is a myth unknown to many. Amidst the current scenario of a pandemic, the market is dynamic and cannot be predicted until the situation stabilises, so where should you invest during such a time? Here is a comparative view of three financial tools along with the risks and rate of returns to help you decide.
Unit-Linked Insurance Plan (ULIP)
ULIPs are insurance plan with an investment component which protects your family as well as enables you to fulfil wealth creation goals. The premium paid gets divided into two parts where one is used for investing in funds and the other goes towards securing a life cover. You can choose to invest in equity, debt or hybrid funds to earn good returns in the future. You are also allowed a certain number of free fund switches per year if you aren’t satisfied with the returns. The life cover provided by the policy gives financial stability to your family in case of a mishap. This sum assured amount can be decided by you based on expense estimation of your family’s needs. With ULIP, you can enjoy tax benefits where the premium paid can be claimed under Section 80C of the Income Tax Act, 1961. The death or maturity benefit can also be claimed for tax deductions under Section 10(10D). But with the current modifications in the tax system, like the tax regime of 2020, the rules for claiming tax deductions have changed. Thus, as an investor, you should know that tax benefits to be claimed won’t be constant.
The returns that you can expect from this investment completely depends on the type of ULIP funds you choose. As there are three asset classes with factors like market movement affecting the returns, your profit is dependent on the fund choice, the holding period of the investment and the risk factors involved with the asset class.
The risk factor for ULIP policies is high as it is a market-linked instrument. But the risk exposure can be minimised by switching between funds and asset classes. You can also employ the asset allocation strategy where the premium is allocated in a fixed proportion between debt and equity funds to reduce risk.
Equity-Linked Savings Scheme (ELSS)
Equity-Linked Savings Scheme is a mutual fund scheme which majorly invests in equity funds. This scheme has a lock-in period of 3-years which lessens the impact of market volatility. You can enjoy the power of compounding with long-term investments where the profit earned over the corpus is reinvested. You can also stay invested in the scheme after the lock-in period if you are earning good returns. This enables you to get handsome returns over a longer period. ELSS allows investors to contribute a fixed amount regularly instead of a lump sum amount opening doors to young investors as well. This investment option offers tax benefits under Section 80C where an investment of up to INR 1,50,000 can be claimed for income tax deductions.
As ELSS majorly contributes towards equity, the returns can be dynamic as it is affected by market volatility. With a low lock-in period amongst other schemes, ELSS is a lucrative choice but fixed returns cannot be assured for equity-linked instruments.
ELSS comes with high risk as the returns are highly affected by market volatility. Also, the short investment duration can increase the risk, thus, long-term investment is required to get high profits.
A mutual fund is a financial vehicle used to invest in securities like bonds, stocks, money market funds and other such assets. The pool of money which is generated by contributions through various investors is collectively used to invest in funds. There are three asset classes like equity, debt and hybrid funds that have its individual risk percentage. The benefit of opting for mutual funds is that a professional fund manager takes care of investing in funds by monitoring the market and with the aid of research.
When investing in equity funds, there are no assured returns as it purely depends on market movement. Thus, it is advised to hold the investment for a long-term to get lucrative returns and even out the effects of the market. Debt funds give fewer returns when compared with equity funds and aim to fulfil short-term goals but the returns are much more assured.
The risk is high for investing in equity mutual funds as these are market-linked instruments and are greatly affected by the ups and downs of the market. By opting for debt funds which invest in corporate and government bonds, government securities, debentures, etc. the risk becomes lower.
When choosing between financial instruments to invest your money during a market correction, you need to opt for the tool that provides more benefits. ULIP policy enables you to secure a life cover and earn returns from the investment component. The risk exposure of the market-linked tool can be reduced to earn a profit, thus, ULIPs are beneficial for investors.