Volatility has become synonymous with equity markets these days. It is making the investors apprehensive about the stock markets, so much so that retail investors are ready to forgo the handsome returns in lieu of stability. Technically speaking, volatility is the unpredictable and dynamic change in the trading price of the stock markets. Volatility is caused by multiple factors, which could be related to micro factors such as the company’s business condition or macro factors such as geopolitical issues and economic downturn. Most of the times, markets tend to give a knee-jerk reaction to the information or news,which causes short-term volatility.
Volatility in stock markets is also seen when there is a sudden market correction. Market correction is a phase when the price of a stock falls by more than 10% following a boom cycle. There can be many factors which lead to a market correction. The market correction phase may sometimes continue for a short period or last a lifetime.
Can your investment products weather the market correction?
Enabling your investments to perform well even during the correction phase requires thorough strategic planning. One of the options to ride the fluctuations in the markets is a Unit Linked Insurance Plan (ULIP). ULIPs are a unique product, which empowers investors to get life cover protection while allowing them to reap benefits of market-linked returns.
Listed below are ways as to how you can weather the market correction with ULIPs.
- Disciplined investment
ULIPs offer an option of monthly, quarterly,and annual premium payment. As a retail investor, you can choose the monthly option as it will be easier on your pocket and will inculcate a sense of discipline in your savings habit. Small amounts, when invested over a longer period, will result in a sizeable corpus without seeming to be a burden.
- Holding for a longer horizon
A trick to weather the market correction is to stay invested for a long-term. ULIPs have a minimum lock-in period of five years, which encourages you to spread your investment over the long term. Disciplined investments in equities over a long horizon irrespective of whether the market is bullish or bearish is the only way in which you can realize real benefits of the equity markets.
This principle driving this is the concept of rupee cost averaging. This is an approach wherein you invest a certain amount at regular intervals. This way you can buy more units when the market is down and fewer units when the market is on an uptrend. This approach reduces the cost of investing. This increases your overall return.
- Switch option
One of the key ULIP benefits of investing in the equity market is the flexibility to switch funds through a feature called ‘fund switching’. You have the option to put your ULIP investments to equity funds when the market is on a bull-run and hold on to the gains by shifting the money back to debt funds when the market is bearish. Switching does not attract any tax liability either.The flexibility of switch in between funds is the best way to navigate the choppy waters of a volatile market. By strategic planning and sound investing acumen, you can make the most of your ULIP.
- Never surrender your ULIP prematurely
During a market crash or correction, it is likely that you get unnerved. However, it is important that you do not surrender your ULIP and continue to pay your premium. You can get a large number of units at a lower ULIP NAV and when the market recovers, your ULIP’s NAV increases, and you are sure to get better returns.
- Avoid looking at results during the short-term
ULIPs are meant for the long-term and you should not do any attempt to time the market to book short-term profits. Some ULIPs plans provide additional units either after a particular period or during maturity. If you discontinue your policy during the tenure due to short-term profits, you will not be eligible for these units.
There is no right time for investing in ULIPs
In case you are confused if you have missed the right time to invest in the ULIPs, be assured that your apprehensions are unfounded. You can invest in ULIPs even when the market is in a recovery mode and generate maximum returns. However, it takes a lot of courage to park your money when the market at the bottom of the bear cycle.
The key tactic is to have a long-term objective in mind and not panic during the volatile periods or during the correction phase. ULIPs offer you an opportunity to have a balanced investment portfolio with exposure to debt as well as equity. So, abandoning a policy midway out of fear is not the right thing to do. This approach would rather lead to losses. All you need to do is use the various strategies wisely and at the right time. Knowing when to switch the fund option, being prepared to buy the ULIPs at lower NAV, and a strong determination to hold on to the funds for a prolonged period are the approaches that will help your ULIP sail through a market correction.