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

2024-08-02

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Unit-Linked Insurance Plans are quite flexible when it comes to accepting and managing investments. You can invest in ULIPs is a mode most convenient to you, and you can invest in a portfolio most suited to your risk profile.

ULIP investment plans are suited for both safe investors seeking stable growth and risky investors looking for market-linked returns. If you are one of the aggressive investors looking to invest in equity funds and want to use the SIP mode of investment, ULIP has the solution for you.

Rupee Cost Averaging (RCA) in ULIP

The distinct advantage of SIP mode of investing in equity funds is the rupee cost averaging. But can you create SIP to an equity fund in ULIP plans? Yes, you can. In fact, there is more than one way of creating rupee cost averaging In ULIP plans:

Paying premiums in monthly mode
Using Systematic Transfer option

RCA by Paying Monthly Premium

When you start investing in a ULIP plan you can choose to allocate your invested money into different fund options, including equity funds. Thus, your premium automatically creates a systematic investment plan to an equity fund, which in turn creates the rupee cost averaging for you.

Using Systematic Transfer Option (STO) for RCA

You can use the systematic transfer option available in online ULIP plans like Invest 4G from Canara HSBC Life, in case you want to invest in any other modes than monthly. Systematic transfer option ensures that your money is invested safely and then transferred systematically to the selected equity fund in monthly SIP mode.

The only difference would be that even your parked money will keep on growing. Thus, instead of investing a fixed amount to the equity fund, the ULIP’s STO liquidates the total number of units in equal monthly parts. At the time of transfer, the ULIP will liquidate one part of units and invest the money into the equity fund.

For example, you want to invest Rs. 1 lakh a year in a ULIP plan and want to use the rupee cost averaging advantage as well. The entire investible premium will be first invested in a liquid fund, and then transferred to the selected equity fund in the following manner:

_Month	_{Liquid Fund Unit Price}	_{Unit Balance}	_{Transferred Units}	_{SIP to Equity Fund}
1	10	10,000.00	833.33	8,333.33
2	10.1	9,166.67	833.33	8,416.67
3	10.1	8,333.33	833.33	8,416.67
4	10.15	7,500.00	833.33	8,458.33
5	10.25	6,666.67	833.33	8,541.67
6	10.25	5,833.33	833.33	8,541.67
7	10.3	5,000.00	833.33	8,583.33
8	10.4	4,166.67	833.33	8,666.67
9	10.4	3,333.33	833.33	8,666.67
10	10.5	2,500.00	833.33	8,750.00
11	10.6	1,666.67	833.33	8,833.33
12	10.65	833.33	833.33	8,875.00

Table 1: Figures in the table does not account for the regular or initial expenses on the policy

As you can see in Table 1, your SIP amount to the equity fund keeps growing with the growth in a liquid fund. However, since the growth in liquid fund NAVs is usually nominal, this increment does not affect the rupee cost advantage much.

Although, if you invest in monthly mode, your monthly instalment into the equity fund will be exactly the same. The systematic transfer option is better than investing your annual premium directly into the equity fund.

Safeguarding Your Corpus from Equity Investment in ULIPs

While SIPs and rupee cost averaging do reduce your risk of investing in equity markets, your entire portfolio still remains in an equity fund. Thus, as you approach closer to your financial goal, you can change your strategy to start a reverse transfer.

At the beginning of the investment, you had transferred the funds from liquid fund to equity fund systematically. Withdrawing from the equity market should also be a disciplined systematic approach. Instead of withdrawing your entire equity portfolio in one instance, let your portfolio subside over time.

Invest 4G plan offers an automatic portfolio management option specifically for this purpose – safety switch option.

If you select safety switch option in your Invest 4G ULIP investment, the plan will automatically start moving your equity fund units to liquid fund. However, this movement happens over a period of four years, in the same manner as STO.

So, in the last four policy years, the fund will stop investing any new funds into equity. It will only move the existing equity corpus to liquid fund. Any new premiums will also go to the liquid fund and stay only there.

The purpose of this strategy is to safeguard your accumulated wealth from market risks when you are too close to your financial goal.

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