Q1. I'm a 40 yo law professional. I’m considering getting ULIPs for the dual benefit deal of insurance and investment. What do you suggest?
Ayesha Tiwari, Patna
ULIPs are popular because they offer a combination of insurance and investment. However, their terms are more complex than any other regular insurance or investment scheme.
Let’s look at the structure first. ULIPs have a 5 year lock-in period. Under ULIP, a part of the premium is towards insurance coverage, and the remaining premium is towards investments. So consider ULIP products that meet your insurance needs adequately and if your return expectations are moderate.
ULIPs can barely be considered a reasonable option for insurance. We’d advise you not to solely rely on ULIPs alone and look at term insurance for your life insurance needs and mutual funds for your long term investment requirements.
To elaborate, let's look at the following: Option 1 - You buy a ULIP plan where ₹x goes towards insurance and ₹y goes towards investments. And Option 2 - Pay ₹x as premium for a term policy and invest ₹y in a long term mutual fund. On an overall basis, you are likely to be better off with Option 2 because of lesser lock-ins, better returns potential and greater flexibility.
Q2. I recently started my first job as a management trainee. I’ve been exploring medium to low-risk investment mutual funds to begin investing. Are thematic funds a good option? I’ve been thinking of investing in tech.
Sameer Reddy, Hyderabad
Thematic funds can be a part of your investment strategy only if you have a higher risk appetite, long-term investment goals, and a good understanding of the theme. Remember that thematic funds are high-risk products.
Thematic funds invest in a broad-based theme, which in most cases covers several sectors and companies. Technology on the other hand is a sectoral mutual fund, and it isn’t exactly a low or medium-risk investment.
For example – a fund launched with housing as a theme will cover companies from cement, paint, tiles, sanitary ware, wire & cable, roads and steel sectors, and importantly, banks as well. A thematic fund with rural consumption as a theme is another example where an increase in rural income can result in an uptick in the sale of two-wheelers, tractors, consumer products, etc.
Unlike any other mutual funds, thematic funds don’t have filters like market capitalization (large-cap, small-cap, multi-cap, etc), style (value & growth), or sector (pharma, infrastructure, etc). It invests across multiple sectors and market caps as long as it is in sync with the theme.
According to SEBI, the minimum investment in equity and equity-related instruments of a particular theme should be 80% of total assets. Thematic funds offer more diversity than sectoral funds and hence can help avoid structural losses. Keeping yourself updated on the market and monitoring your funds can offer promising returns in thematic funds.
We generally advise beginners to start with index funds or ELSS. Once you realize your financial goals and risk appetite, you can try out different strategies. However, if you are keen on investing in technology, first do your research. Remember these points:
- It takes time for any sector or market to grow. So your investment horizon should at least be 5 years. The investment objective of the fund must align with your goals.
- Both structural and thematic funds are high-risk investment schemes, so invest only the amount you would be okay to lose, in case things go downhill.
- Ask yourself if your interest in the scheme comes from your knowledge of the theme or FOMO of hot stocks and trends.
- Study the past performance of the scheme, and find out its expense ratio. Fully understand the market risks before investing and keep monitoring your investments.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
Kuvera is a free direct mutual fund investing platform.