There is no age limit for embarking on a road to healthy financial habits. However, the earlier you start, the better the results in the long run.
With a focus on automatic savings and investments, and building a secure financial future, it is important for you to kickstart right now and also gain from the power of compounding in the bargain.
For instance, a unit-linked insurance plan (ULIP) is a suitable investment tool which can offer you the benefits of compounding considering there is a lock-in period of five years. You can continue to reap the benefits of compounding if you decide to continue to stay invested for more time.
Here’s the lowdown on the ways to building financial habits, power of compounding and how it benefits to invest in ULIP.
Focus on Budgeting: A healthy financial habit to adopt and remain particular about is budgeting for you. With an eye on income and expenses, it is possible for you to keep things under check and boost savings in the bargain. Budgeting will help you in the long run when it comes to building a decent corpus.
Savings as a Goal: It is crucial to build a safety net for financial security. You need to allocate a small portion of your income towards saving each month. In case of any emergency or any eventuality, this money would help you to tide over the phase. It would also be important to meet your financial goals.
Gain an Edge by Investing: You need to understand that there are key differences between saving and investing. The earlier you understand this, the easier it becomes to reap the benefit of the power of compounding from investing. Keep yourself updated with various investment schemes or plans on a monthly basis. There are scores of investment opportunities available for you today with new ones getting added on a daily basis.
For example, ULIPs are gaining in popularity among investors with various types of life goals, from youngsters who have just begun their professional journey to senior professionals who are on the verge of retirement.
Understanding the Power of Compounding
The power of compounding—which is derived from compound interest—is a unique tool that can transform your small investments into creating a respectable corpus. You need to understand that the compounding adds interest on interest.
When the power of compounding comes into play in any investment scheme, the returns will be compounded on a monthly basis, generating higher returns in the long run.
The additional gains from compounding may seem modest at first, but over a period of time they can snowball, multiplying the principal and the accumulated interest. When the amount you have invested earns interest, this interest starts accruing interest of its own. That’s what is called the power of compounding.
Time remains a crucial component to harness the power of compounding. So, the more time you give it, the more powerful compound growth’s effect can be witnessed.
Having said that, compounding needs time for the benefits to manifest, however, investors of any age can gain from its power. The situation of every investor is different, depending on the financial goals, investment time horizon, circumstances and risk-bearing capacity.
The above-mentioned benefits of compounding are visible for long-term investments, and ULIPs are one such investment.
Unit-Linked Insurance Plan (ULIP) and Benefits of Compounding
If you are an investor who takes moderate to low risks with investments and looking forward to a long-term investment instrument, ULIPs present a suitable option. ULIPs comprise two components, where a part of the premium goes into the life insurance plan, while the remaining part is invested similarly to a mutual fund.
Life insurance: A ULIP provides a life insurance cover.
Lock-in period: As ULIPs offer life cover, there is usually a lock-in period of five years.
Taxation: The premiums for ULIPs are tax-deductible up to Rs 1.5 lakh per annum, according to Section 80C of the Income-tax Act (ITA), 1961.
Expenses: There are some expenses in the case of ULIPs such as premium allocation charges, administration charges, fund management fees, and mortality charges, among others.
Transparency: The levels of transparency in terms of asset allocation and expenses have improved in the case of ULIPs. While ULIPs remain complex policies with both insurance and investment components, insurers (insurance companies) tend to publish daily net asset values (NAVs) on their respective website.
If you are looking at a long-term investment option and do not have an additional life insurance policy, you can always opt for a ULIP scheme.
In this regard, HDFC Life Sampoorn Nivesh is a unit-linked non-participating life insurance plan for your financial protection needs.
HDFC Life Sampoorn Nivesh gives you a mix of debt, equity and hybrid funds to invest in. It is also a great way to have a disciplined savings plan.
As per a popular Chinese proverb: The best time to plant a tree was 20 years ago. The second best in now. Keeping this in mind, go ahead and make your move toward gaining financial independence in the long run, reach out to a professional expert to know more about a ULIP scheme.