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25-Year-Old Invests in ULIP: Will It Be a Wise Choice?

Ramalingam Kalirajan |7122 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 03, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Oct 02, 2024Hindi

I have recently open an ULIP of India first life money balance plan .In which I am going to pay 1.5lacs yearly. Can u guide me will it be beneficial for me in upcoming year as I am still 25 . If it is beneficial then for how many years shall i continue this. If not then pls guide me for more investment options

Ans: At the age of 25, your financial decisions today can have a long-term impact. You’ve mentioned you are currently paying Rs 1.5 lakh annually into the India First Life Money Balance Plan, which is a ULIP (Unit Linked Insurance Plan). Let's assess whether continuing with this plan is beneficial or not.

ULIP: Combining Insurance with Investment
ULIPs offer both life insurance coverage and investment in market-linked instruments like equity or debt. While this might seem convenient, it’s important to understand that combining insurance with investment is often not the best way to build wealth.

High Costs Involved
ULIPs come with various charges such as premium allocation charges, fund management fees, policy administration charges, and mortality charges. These charges can eat into your returns, especially in the initial years of the policy. The returns from the investment portion may not be as high as mutual funds due to these costs.

Limited Flexibility
ULIPs lock your funds for a period of five years, limiting your liquidity. While long-term investments are good, having some liquidity options is essential. The flexibility to switch or withdraw funds is much lower compared to mutual funds.

Insurance and Investment Should Be Separate
It’s generally recommended to keep your insurance and investment separate. Why?

Term Insurance for Coverage
A term insurance plan provides a large sum assured for a low premium. It offers pure life coverage without mixing it with investments. You should consider a term insurance plan to secure your life. For example, a Rs 1 crore term plan at your age will be affordable and provide sufficient coverage for your family.

Mutual Funds for Wealth Building
Mutual funds are better suited for wealth building over the long term. They have lower costs, more transparency, and give you access to a variety of funds based on your risk profile. Actively managed equity mutual funds can generate better returns over time compared to ULIPs.

Should You Continue with the ULIP?
Given your age, you have a long time horizon to invest and build wealth. While ULIPs may provide some returns, they are not the most cost-effective way to invest. Here’s what you should consider:

Surrendering the ULIP
If you are in the early stages of the ULIP, you can consider surrendering it after the lock-in period (if applicable). Yes, there may be charges for early surrender, but in the long run, redirecting your funds into a more efficient investment strategy will likely yield better results.

Switch to Term Insurance + Mutual Funds
If you decide to stop the ULIP, you can opt for a term insurance plan for your life coverage and invest the Rs 1.5 lakh annually in mutual funds. This combination will provide both security and growth for your wealth.

Investment Options for Long-Term Growth
Now, let's discuss where you can invest your Rs 1.5 lakh annually to get better returns over your long-term horizon.

Equity Mutual Funds for Growth
Equity mutual funds are one of the best long-term investment vehicles. Since you are only 25, you can afford to take more risk for higher returns. Equity mutual funds allow you to benefit from the growth of the stock market. Actively managed funds, in particular, can outperform the market, unlike index funds which simply replicate the market’s performance.

Debt Mutual Funds for Stability
While equity gives you growth, it’s important to balance your portfolio with debt funds. Debt mutual funds provide stability and reduce overall risk. A mix of equity and debt will ensure you are not overly exposed to market volatility.

Systematic Investment Plan (SIP)
Consider starting a SIP to invest consistently in mutual funds. With SIPs, you can invest monthly, which helps in averaging the cost of investment and reduces the impact of market volatility.

Public Provident Fund (PPF)
The PPF is a safe and long-term investment option, especially for retirement planning. It offers tax-free returns and is backed by the government. You can consider allocating a portion of your annual Rs 1.5 lakh towards PPF for tax benefits and safety.

Focus on Tax Efficiency
When planning your investments, tax efficiency should be a key consideration. Mutual funds, particularly equity funds, offer favorable tax treatment compared to ULIPs.

Equity Mutual Fund Taxation
Long-term capital gains (LTCG) above Rs 1.25 lakh from equity mutual funds are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%. Over the long term, mutual funds can provide better post-tax returns compared to ULIPs, which have higher costs.

Debt Mutual Fund Taxation
Gains from debt mutual funds are taxed according to your income tax slab, both for short-term and long-term capital gains. Keeping your money in debt funds for more than three years helps you benefit from indexation, which lowers the taxable amount.

Long-Term Wealth Creation
At 25, you have time on your side, which is a great advantage. By investing wisely in a diversified portfolio of equity and debt, you can create substantial wealth over the next 10-15 years.

Rebalance Periodically
Over time, markets fluctuate, and so will the value of your investments. It is important to review your portfolio regularly and rebalance it as necessary. A Certified Financial Planner (CFP) can help you make adjustments and stay aligned with your financial goals.

Stay Disciplined
The key to long-term success in investing is discipline. Continue to invest regularly, increase your contributions as your income grows, and remain patient to allow your investments to grow over time.

Final Insights
At your young age, it’s better to separate your insurance from your investment. A term plan combined with mutual funds will serve you much better than a ULIP. Mutual funds offer greater flexibility, lower costs, and better growth potential. If you decide to stop the ULIP, ensure that you invest regularly in a diversified portfolio of equity and debt funds.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Asked on - Oct 08, 2024 | Answered on Oct 09, 2024

Thank you so much sir for giving me such a wonderful advice. As I've already cancelled my ULIP within free look period ,now according to your advice I am going to invest in your suggested plans.

Ans: You're most welcome! I'm glad the advice was helpful, and it's great to hear you've already canceled your ULIP during the free look period. Now that you're moving forward with your new investment plans, I'm confident you'll be on the right path to achieving your financial goals. If you need any further assistance, feel free to reach out anytime.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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