Balanced Asset Allocation can help you maximize risk-adjusted returns while keeping volatility under check

The pandemic has impacted lives and livelihoods in many ways ranging from job losses and loss of life to rising prices and depleted savings.

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It has also led to uncertainties about returns and limited investment options, which often provides valuable lessons on how to invest your hard-earned money, achieve long-term savings goals, and the importance and versatility of life insurance as a tool to realize it.

Whatever the difficulties, it is imperative that you develop a financial savings plan which will secure you and your family financially.

We spoke to Gautam Sinha Roy, Senior Vice President & Fund Manager - Investment, ICICI Prudential Life Insurance Company Limited to understand the importance of investing in ULIPs:

Despite all challenges posed by the pandemic, the Indian economy has shown astounding resilience and bounced back, leading to a strong rally in the stock markets.

However, this rise also comes with volatility. So, if you have a clear understanding of your risk appetite, and are equipped with enough financial markets knowledge, Unit-Linked Insurance Plans (ULIP) offered by life insurance companies provide a good option to help you make these investments and achieve your financial goals.

What are ULIPs and how do they work

ULIPs are market-linked insurance plans that offer a combination of both life insurance and investment and help you to systematically build wealth.

The very design of ULIPs enables you to remain invested for a longer duration with an option to choose the premium payment frequency which best suits your wallet i.e. monthly, quarterly, half-yearly or annually.

Moreover, these products are extremely transparent. Financial goals, for instance may include a child’s higher education or building a retirement corpus and ULIPs can enable you to achieve them. However, since these are long-term investment products, it is recommended that ULIPs should be purchased with a 10-year time horizon at least.

At the time of purchasing a ULIP you have the flexibility to choose the asset allocation strategy that is best suited to your risk-taking ability.

The net premiums are allocated as per the asset allocation strategy chosen by you and this investment corpus is managed by seasoned fund managers.

However, in a connected world that is constantly disrupted for multiple reasons, choosing a balanced asset allocation can deliver superior risk-adjusted returns.

Let us understand balanced asset allocation.

Cross-checking the seven to ten years performance of a ULIP plan can give you a fair idea about the returns that you can expect. The returns offered can also be benchmarked against indices like Nifty and Sensex.

For instance, as of June 30, 2021, investment in the ICICI Prudential Life Opportunity Fund over 7 years and 10 years has given returns better than the benchmark (BSE 200) for the same period.

Even after the 2008 global financial meltdown, the markets did eventually recover and scale new heights.

The mantra being - ‘Time in the market and not timing the market’. ULIPs offer a safe, transparent, and efficient route to build wealth and achieve long-term financial goals, provided you stay invested.

Balanced asset allocation and its benefits

Having a balanced asset allocation strategy, simply put, is spreading your risk across the two primary asset classes i.e. equity and debt. Astute investors never put all their eggs in one basket.

Leading life insurance companies offer balanced funds which may invest 65%+ in equities and the remainder (up to 35%) in debt.

While equities can be volatile, they have the ability to deliver inflation-beating returns whereas debt investments provide steady returns.

In other words, you can gain from the potential upside in equity markets while continuing to benefit from the steady returns offered by debt instruments.

Given the prevailing economic conditions, a balanced asset allocation strategy can provide you with the best of both asset classes.

ULIPs with a balanced asset allocation fund offers an excellent route for you to leverage the India growth story and build long-term wealth.

The flexibility in easily fine-tuning the asset allocation depending on the market conditions will enable you to maximize risk-adjusted returns while keeping volatility under check.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)