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Does Rupee Cost Averaging Work In Unit-Linked Insurance Plans?

Rupee Cost Averaging in ULIP can improve an investor's financial and emotional stability. It automates the process, minimizes investment uncertainty, and separates financial decisions from emotions.

  • 3,311 Views | Updated on: Jun 07, 2024

The concept of a Unit-Linked Insurance Plan says when it comes to accepting and handling investments, plans have a lot of leeway. Linking Rupee Cost Averaging in ULIP can be done in the way most suited to you, and your portfolio can be tailored to your individual risk tolerance needs.

    Key Takeaways

    The primary benefits of the Rupee Cost Averaging method in ULIP are as follows

  • The Average Purchase Cost Declines
  • Protects Your Capital Against Volatility
  • Investment is Cost- Effective

Both conservative savers and more adventurous traders can find what they’re searching for in a ULIP investment plan: consistent growth and exposure to the market. ULIP is a solution for you if you are an ambitious investor who wants to invest in equities funds using the rupee cost-averaging and Systematic Investment Plan (SIP) method.

What is Rupee Cost Averaging?

The Rupee Cost Averaging strategy involves investing a given amount of money at regular periods regardless of whether the markets are rising or falling. This guarantees that you purchase more units when the market is low and fewer units when it is high. It is a relatively new strategy, yet it is prevalent among prudent investors. The method enables them to profit without incurring common equities market risks.

Investors typically incur losses because they believe they can time the market effectively. However, market timing is exceedingly difficult, if not impossible. Millions of investors worldwide have lost their whole investment capital trying to time the market. The Rupee Cost Averaging method enables you to think creatively and balance your investments.

In the cost-averaging method, you invest a constant monthly amount in one or more mutual fund schemes, regardless of the fund’s Net Asset Value (NAV). When the NAV is low, more units are added to your account. When the NAV is high, though, you receive fewer units. As an investor, you are not concerned about variations in the NAV because your monthly contribution amount remains constant. Alternatively, you may invest every quarter or every six months.
Rupee Cost Averaging allows you to ride out the short-term volatility in market pricing to enjoy substantial long-term returns. The Systematic Investment Plan, or SIP, is a typical illustration of this strategy.

Rupee Cost Averaging in ULIP

Rupee Cost Averaging in ULIP is a significant benefit of investing in equity funds in the SIP method. However, SIPs to equity funds in ULIPs are possible to establish. You can make Rupee Cost Averaging in 2 different ways when it comes to ULIPs

Regular monthly premium payments

When you begin investing in a ULIP plan, you will have the opportunity to select how your money will be distributed over various fund alternatives, one of which may be equity funds. Therefore, the payment of your premium immediately initiates the creation of a systematic investment plan to an equity fund, which then initiates the creation of a cost-averaging method for you.

Methods of Systematic Transfer

The money you set aside for investing will be sent each month automatically into your chosen equities fund using the systematic transfer option. The only real difference is that even your cash will continue to grow.

Thus, the ULIP’s STO (Stock Transfer Order) liquidates the complete number of units in equal monthly segments rather than depositing a predetermined sum to the equity fund. Instead, the ULIP will sell a portion of the units and put the proceeds into an equity fund at the transfer time.

Benefits of Cost Averaging

The cost-averaging method is proven to be extremely beneficial when linked to ULIPs. Mentioned below are some key advantages.

The average purchase cost declines

A mutual fund investor who invests a large quantity all at once loses the chance to spread their funds over a longer period. Because of this, your average price is identical to the cost of the item you’re buying.

The Rupee Cost Averaging method, on the other hand, spreads your investment out over time. Furthermore, the average price per unit falls when more units are purchased at a time when the NAV is low.

Protects Your Capital Against Volatility

Seasoned investors, especially options traders, use volatility to their advantage. High volatility can wipe away tiny investors’ funds in one trading session. Rupee Cost Averaging protects money from volatility. If the market falls owing to severe volatility, you get additional units.

Your profit margin will rise with the market. Thus, cost averaging protects your cash and saves you from overtime during turbulent periods.

Cost-Effective Investment Amount

SIP investments often begin at ₹500 per month. However, if feasible, try investing more. Since the dangers are limited, you may confidently invest a more considerable sum. However, before investing a large sum, you should assess the development potential of the market and the stocks in general.

Consequently, Rupee Cost Averaging allows you to invest less while earning a high return.

Conclusion

The financial and emotional stability of the investor can be strengthened through the use of Rupee Cost Averaging in ULIP while investing in SIPs. It facilitates the automation of the entire procedure, reduces uncertainty about when to invest, and disentangles emotional state from financial decisions. Better results can be attained using such approaches since they require less work and greater self-discipline.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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