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Does Rupee Cost Averaging Work in ULIP Plans?

A ULIP policy offers the best of both worlds to an investor – the stability of an insurance policy and the volatility of an investment plan. With ULIPs becoming more and more popular, investors are looking at different approaches to making the most of this unique product. One such strategy that you may have come across is the rupee cost averaging method. This method has traditionally been linked to mutual funds and Systematic Investment Plans or SIPs in particular. But does the concept of rupee cost averaging work in ULIPs? Let’s find that out.

What is a ULIP policy and how does it function?

The first step is to understand how a ULIP policy works. The premium payments made by the policyholder towards a ULIP policy are directed in two directions. One portion is used to provide the life cover for the policy and the other is intended for investments. The investments happen in a similar vein to mutual funds. The company pools together specific portions of the premiums of the policyholders and then uses that pooled money to invest in financial instruments. Depending on the amount you have invested and the kind of instruments you have opted for, you are issued ‘units’ corresponding to your share of the pooled money.

The returns you receive vary according to how this investment performs. Though it is difficult to presume how certain instruments may perform in the future, certain tools like the ULIP calculator can help you get a clearer idea. Looking at the trends of past years may also be a good idea in such a scenario. Now that you are aware of what is a ULIP policy, let’s look at the RCA method.

Where does the rupee cost averaging method come into the ULIP picture? 

For the uninitiated, the rupee cost averaging method is an approach in investment wherein a fixed amount of money is invested at certain intervals. Rather than buying more units when the markets are bound to be high or vice versa, one continues to invest the same amount throughout, regardless of the market performance.

Since ULIPs are long-term investments with a minimum lock-in period of five years, taking a long-term approach is the best way to maximise the returns. A concept like rupee cost averaging works best in such a scenario. Whether you buy a ULIP plan online or offline, you have to pay a premium at regular intervals; a fixed portion of this premium keeps getting invested into market-linked instruments every time. So, when the markets are low and the prices of the instruments have reduced, the fixed amount buys a larger number of units. When the markets are high with an increase in the prices, the fixed amount buys a lesser number of units.

The losses, if any, incurred during market lows are averaged throughout the continuous policy duration. This helps your investment be stable over a long period of time without getting majorly affected by the ups and downs of the market. If you want to know what span of time may be the most suitable to meet your financial goals, you can take the assistance of a ULIP calculator.

How to make rupee cost averaging work for you?

Most companies offer the policyholder to make either monthly, quarterly, half-yearly, or annual premium payments. The rupee cost averaging method may not be optimized in the case of premium payments with long distances in between. The best payment mode for investors looking to utilize the rupee cost averaging method is to opt for monthly payments. Since the investment is spread out over a longer period of time, it dilutes the risk that may come with short-term market movements.

Despite the stability that comes because of rupee cost averaging, it is vital to remember that your money is invested in equity-linked instruments. Thus, they are subject to market volatility. If you feel that your investments are not going in the right direction, you can always opt for fund switching and transfer your investments in debt funds.

A consultation with a financial expert can also help you yield better results. We hope the information presented here helps you maximise the returns when you buy a ULIP plan online!

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