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Choose the right financial products

| 8/14/2011 10:25 AM Sunday

As we all know, investment is an ongoing process. To be a successful investor, one must choose the right products and the right strategy to invest in them. Considering the wide range of investment options that are available today, selecting the appropriate ones is a challenging task. Let us discuss some of these options and how you can select the most suitable ones.

Traditional Instruments vs. MFs
There are investors who feel that it is much safer to invest in bank FDs, insurance or bonds, than in mutual funds (MFs). It is no wonder then, that MFs do not find a place in their portfolios. The fact, however, is that the MF industry is a very well-regulated one, and that should be a big comfort for investors. The regulations governing the industry are well-defined, and the SEBI is doing a great job of monitoring its working and ensuring that schemes are managed on a day-to-day basis in the interest of investors. Besides, MFs offer a variety of products to suit the risk profile and time horizon of investors. It is time that investors seek out smart options like MFs to get the most out of their hard-earned money.

RD vs. SIP
For those risk-averse investors who invest regularly, a Recurring Deposit (RD) is one of the preferred options. The fact, however, is that to create wealth over a period of time one must invest in options that have the potential to provide a positive real rate of returns, i.e. rate of returns minus inflation. Traditional instruments such as a bank RD may not be appropriate, as they do not provide adequate safeguards against inflation. Besides, investing in RDs is not a tax-efficient option either.

Here is where products like equity funds step in. There is no doubt that investing in equity funds can be risky if one invests in a haphazard manner and/or invests only to make a quick buck. Remember that “risk versus return” ratio is an important factor in investing. To earn higher returns, one has to take calculated risks. This risk, however, gets substantially reduced if one invests regularly through a Systematic Investment Plan (SIP) over a period of time.

ULIP vs. Equity Funds
Before we discuss the dilemma of investors regarding these options, let us understand what a ULIP and equity funds have to offer. A ULIP, or unit-linked insurance plan,  is a type of investment where the characteristics of insurance and mutual funds are combined. Accordingly, a part of the premium is utilised towards the mortality cost and the administrative charges, and the rest is invested as per the options selected by the investor. On the other hand, an equity mutual fund is a pure investment option that provides long-term growth through capital appreciation, although dividends are also a source of revenue for investors.

There are a few factors that need to be considered before making a choice between an equity fund and a ULIP. First, the focus should be on being adequately insured. While a ULIP can be a good option, it may not always provide adequate insurance cover.

Secondly, MFs not only provide a wide range of choices – from plain vanilla equity funds to sector and specialty funds – but also a high level of flexibility to realign the portfolio, both in terms of equity/debt exposure, as well as reducing/increasing exposure to different segments of the market. This allows investors to make a choice according to market conditions and their own circumstances. In this respect, MFs are definitely a superior option than ULIPs.

Considering these factors, the choice between ULIPs and equity funds would depend on one’s need and ability to take decisions, with regard to various options offered by mutual funds and their suitability. For those who have the ability and access to proper advice to assess their insurance and investment needs, the best solution is to go for separate options, rather than going for a product like ULIP. For someone who is looking for a product that can take care of multiple needs, a ULIP may be a suitable choice.

 

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