While it is every investor’s dream to get high returns in a shorter period, wise investors usually alleviate some of these fluctuations by investing for a longer period by studying the nature of their investments.However, when it comes to savings and investments, timeplays a vital role.
Although, the purpose and benefits of purchasing a ULIP is best known to people, the choice of right duration of investing in ULIP is still a matter of concern. So, before you decide on a short-term or long-term investment, it is important to think about your goals andwhat you’re investing for and how liquid or accessible you need your cash to be. In this article, we will discusswhat a short-term is in comparison of long-term and how to receive the desired returns in given time horizon.
Typically, ULIPs have a lock in of 5 years. During this period, the policyholder does not receive any pay-outs. Any types of withdrawal are only allowed after the end of lock-in.
Short Term Investments
Although there is no single defined periodfor short-term investments, but considering the lock-in period in ULIPs, any investmenttraded within the time frame of 5-10years (ULIPs) can qualify as short-term. People invest for the shorter durations primarily because they don’t want to take the risk of locking in their money for a longer tenure or they want to accomplish short term goals for themselves or their family such as buying a car, purchasing household expenditure, payment towards rent or student loans.
Even if short term investing comes with certain advantages, there are disadvantages as well such markets are volatile in short term so the risk is comparatively higher and it gets worse if you put all your money in a single spot. Also, short term investments hold the risk of not holding enough return value when adjusted by inflation. However, if you are in need of money immediately, long-term stock investments may not be the route for you.
Long term investments generally show a steady growth space over a period of time. This tends to long term investment being more stable and less risky than short-term investment. Not that long term investments don’t come with risks. While you have time by your side, the market fluctuations are unpredictable anyway. So, when it comes to long term investing, equities have generally managed to perform other asset classes which comes with intermittent volatility and market corrections.
As you grow older or near the maturity of insurance policy, most insurance companies depending on the market trend allows you to move the accumulated funds from one fund to another subject to your financial priorities. For example, imagine you are investing for your retirement fund. In the beginning, investing a major portion of your fund inequity is a good idea. But as you near your retirement age, it is better to gradually shift your funds from equity to debt, which are safer investment avenues. This is to avoid any unexpected losses in case of a market crash. Most people with good knowledge of the market and the investment options available in the market prefer to exercise this option after making an informed decision. Switches between funds is known to be the best way to capitalize on investment opportunities and is an aggressive scheme for those who seek to get higher returns.
According to industry experts, starting an investment in ULIP at an early stage and letting your investment grow for a longer period has major advantages. One can derive significant benefits from the power of compounding in their journey to achieve financial goals. Let’s explain it by giving an example – If you start investing in ULIP plan at the age of 30 by paying 10,000 every month for approximately for 10 years, your investment will grow to Rs20.66 lakhs after 10 years @10 percent p.a. However, the same amount of money if you invest for 10 years, your investment will grow to Rs1.39 Cr after 30 years @10% p.a. which is way more than short term investment.
Views expressed in this article are the personal opinion of Ayush Mittal, Head- Investments (Life Insurance), Policybazaar.com.