Don't splurge on your bonus
It is that time of the year, when some of you are due for your annual increment and performance bonus. While you may like to splurge your first incremental salary out of sheer happiness, what do you do with the subsequent ones and the hard-earned annual bonus is the question. If you are someone who understands your financial responsibilities, you will surely decide to invest the full bonus amount or at least a portion of it for a better future, as against spending it on short-term purchases. In such a case, the decision that needs to be taken is which financial instrument or which combination of instruments you should opt for. These obviously depend on your risk appetite and your desire for returns.
While some of us would just like to keep the bonus money secured in the bank account, some might use it to buy stocks in the market. For a consistent saving of a portion of the increment, there are two instruments that one could choose from — Ulips and mutual funds. Both of them give higher returns in the longer term due to the power of compounding yields. Each comes with its own advantages and disadvantages.
Ulip stands for Unit-Linked Insurance Plan. Its biggest benefit is that it combines the features of both life insurance cover and investment opportunities under a single plan. When the premium is paid, a part of the amount goes towards providing insurance cover for the policy holder, and the other part is invested in stocks and bonds so that the policy holder gets wealth appreciation. As a policy holder, you have the freedom to choose which asset class the investment should be made in. The policy holders, who are risk averse, can choose to have their money invested in bonds, while those who don’t mind sacrificing risk for higher returns can opt to have the money invested in equities.
While Ulips may seem to be more expensive than mutual funds in the initial years, being a long-term product, this cost is spread over a longer period and hence, becomes similar to the cost of investing in mutual funds. Another advantage that Ulips offer is tax benefits. This is comparable to tax saving schemes of mutual funds. Both these products offer income-tax deduction under Section 80C of the Income-Tax Act up to Rs 1.5 lakh. While in case of mutual funds, the lock in period for the investor to avail this tax benefit is three years, it is five years in the case of Ulips. This actually helps the Ulip investor in reaping better returns by making him stay invested for a longer period. One should link their investments in Ulip to a long-term goal and run it till the originally-desired term by paying their premiums regularly.
The key difference between mutual funds and Ulips is the life insurance cover provided by the latter. While mutual funds are pure investment products, Ulip is a hybrid product providing insurance cover and investment. In addition, while most mutual funds don’t guarantee any returns, some Ulips offer a minimum amount in the form of a sum assured in case of death of the policy holder or the fund value, whichever is higher. In this way, Ulips are superior to mutual funds. The other benefit of Ulips is, unlike mutual funds, where in case, depending on your risk appetite, you would like to invest in different kinds of funds like debt, equity, diversified, index, liquid funds you will need to research on and invest in multiple products (incurring multiple costs as well), in Ulips you can select from multiple funds in the same product. Also, with the ‘Switching & Top-Up’ facilities that Ulips offer, you can either switch your investments from one fund to the other or also add more money to the fund of your choice without needing to research on multiple funds and incurring additional entry load charges. Top-up charges in Ulips are also generally much lower than entry load charges of mutual funds.
We have often heard the phrase, ‘Save for a rainy day’… It is important to set aside money, not only for emergencies, but also for major expenses like education, house, car, and eventually retirement. In short, investing your hard earned bonus today will go a long way towards making you happier over the long run.
(The writer is the president and chief institutional business officer, Bajaj Allianz Life Insurance)