How power of compounding helps enhance ULIP returns

Every life insurance product might help you to inculcate a disciplined investing habit. Whether it is a traditional life insurance policy or a Unit Linked Insurance Plan (ULIP), you can grow your funds by investing regularly. Besides, you can also receive good amount of money in return of your investments for fulfilling your life goals. A prudent investment in the life insurance-and-market-linked-product can be an ideal way to enhance your ULIP plans returns due to the power of compounding benefits.

Before we begin this article, let’s first understand what is compounding in detail:

In technical investment terms, compounding is an excellent way of earning ‘interest on interest.’ In simple terms, compounding is a tad bit similar to the multiplier effect since the interest you earn on the invested capital also receives interest. Hence, your investment value grows exponentially than linearly.

For instance, if you invest Rs. 1,000 every passing year, it will eventually grow to Rs. 1,84,166 in ten years at an annual interest rate of 8%. In the next twenty years, you can earn Rs. 5,92,947 at the same interest rate. When you invest in a market-linked product like a Ulip plan, the chances of maximizing your earning are more due to the benefits of the power of compounding.

Now that we have understood what power of compounding is, let’s proceed further to understand its impact on returns and how it enhances on them:

1. Utilize the dual benefits of the ULIP policy

Being a dual benefit product, a ULIP policy provides the benefits of investment and insurance under a single integrated plan. It is a recommended choice for fulfilling long term goals like planning your kid’s wedding or sending them abroad for higher studies, purchasing a new house, and so on. When you invest in a ULIP plan, you can maximize your savings with the help of the power of compounding to receive high returns on your invested capital.

2. Invest in a ULIP Policy for a long duration

In a ULIP policy, your invested amount is directed into two different paths:

• A specific proportion is used to offer life coverage
• The other remaining half goes towards your equity and debt instruments. As a policyholder, you should choose between these two

ULIP funds based on your financial goals and risk appetite.

NOTE: When you purchase a ULIP policy, you should stick to it for a longer duration to reap the benefits of the power of compounding.

3. Make use of the switching option

As a policyholder, many insurance companies would let you shift from equity fund to debt fund, and vice versa. If you make use of the switching feature of a ULIP policy, you can secure your investments against market volatilities. Under a ULIP plan, the equity investments are made at prevailing Net Asset Value (NAV) of the fund. NAV is usually the price of each unit of the fund, which can be calculated by dividing the sum of all the investments of a fund by the number of issued units.

Conclusion:

A ULIP policy would allow you to grow your funds with the benefits of compounding substancially. When you invest in a ULIP plan, you should make the most of the market-linked investments to achieve it. Select the right policy smartly and stay invested for a longer duration.