The most important determinant of an investor’s long run investment results is composition of assets or asset mix in the investor’s portfolio. While factors such as security and manager selection do matter, statistically speaking, their impact keeps falling as investment horizon gets longer leaving asset-allocation as the dominant factor driving investment results.
Thus in any financial planning process, arriving at an appropriate asset allocation is the most important decision variable. In the asset mix, there are likely to be assets which have higher rewards and higher risk such as equities, and assets which have lower rewards and lower risk such as government bonds. In other words, over the long term, policy holders cannot expect equity type of returns by participating in pure debt funds (low risk –low reward) and vice versa.
An investor should balance risk tolerance with the goal of maximizing future value over the investment horizon. Risk tolerance is ability to tolerate either a more likely temporary, or a less likely permanent fall, in the value of investment. Investors who do not have the ability to tolerate fall in value of investment from time to time i.e., volatility in returns should restrict their exposure to riskier asset class of equities. Likewise, investors who have substantial working life ahead and who have limited financial liabilities in the medium-term should take exposure to high level of equities in their overall asset allocation.
We sincerely advice our existing and prospective policy holders to reflect on their risk bearing ability and choose as appropriate asset allocation and thereafter contribute regularly, either monthly/quarterly or yearly basis, to achieve their long term financial goals.
ICICI Prudential Life Insurance Company offers a wide suite of funds which range from equity funds to pure debt funds and also balanced funds (a blend of both debt and equity) available for policy holders with varied risk appetite and investment horizon. Details available in the below Exhibit 1.
(Please refer to individual policy related document for the availability of the funds as per your choice)
|Asset allocation||Risk- Reward profile||Invests money||Suitable for|
|Equity||High risk – High return||Shares or equity of companies , and prone to the volatility in equity markets||Young savers who are in accumulation phase for their long-term uses|
|Balanced||Medium risk – Medium return||Shares and fixed income securities in different but pre-defined proportions||Middle stage of accumulation phase or last few years of working life|
|Long term debt||Low risk – Low return||Corporate bonds or government-bonds||Older people retired or close to retirement for whom protection of savings is most important|
|Short term debt||Low risk – Low return||Highly liquid, virtually risk-free, short-term debt securities of agencies of the Indian Government, banks and corporations and Treasury Bills||For investors who want to park their money for the short-term before some other allocation decision is taken|
Systematic Investment Plan (SIP):
SIP is a financial planning tool available for policy holder’s to create wealth and achieve their long term financial goals by contributing a fixed amount in a selected fund(s) at regular intervals, which could be either monthly, quarterly or yearly. The key benefits of SIP to policy holders are rupee cost averaging and also it inculcates disciplined approach towards financial savings rather than ad hoc investment decisions.
With the help of SIP, policy holders need not be concerned about timing the market correctly. Market timing risk is the risk of entering the market at a high price which may reduce long-term returns, or the risk of losing out on upside by waiting too long for a low level to enter. Policy holders trying to time the market correctly have either missed out big market rallies or have invested a lump-sum amount just when the markets have peaked. SIP helps policy holders ride the market volatility by averaging out the cost as they invest a fixed sum regularly at various levels.
SIP also helps in benefitting from the power of compounding, which means longer the investment horizon, the greater the benefit.
SIP is a tool to reduce risk of market timing, and as such it is not a return maximizing tool. In a rising market SIP investing underperforms lump sum investing at inception and in a volatile market SIP outperforms lump sum investment. Given that markets on average tend to be volatile rather than uniformly rising, usually SIP is a good risk management tool for policy holders in reducing market timing risk.
Exhibit 2: Policy holder systematically investing
|Premium 1||November 27, 2001||50,000||10.33||4,840|
|Premium 2||November 30, 2002||50,000||10.88||4,596|
|Premium 3||November 29, 2003||50,000||18.52||2,700|
|Premium 4||November 30, 2004||50,000||23.05||2,169|
|Premium 5||November 30, 2005||50,000||32.10||1,558|
|Premium 6||November 30, 2006||50,000||46.48||1,076|
|Premium 7||November 30, 2007||50,000||66.33||754|
|Premium 8||November 28, 2008||50,000||34.53||1,448|
|Premium 9||November 30, 2009||50,000||60.80||822|
|Premium 10||November 30, 2010||50,000||71.41||700|
|Premium 11||November 30, 2011||50,000||60.12||832|
|Premium 12||November 30, 2012||50,000||72.49||690|
|Premium 13||November 29, 2013||50,000||79.29||631|
|Premium 14||November 28, 2014||50,000||113.70||440|
|Premium 15||November 30, 2015||50,000||109.76||456|
|Total, Average||750,000||53.99 (Average)|
|Fund Value||September 30, 2016||2,759,594||116.39||23,710|
Fund performance only. Actual example for policy holder investing systematically in Maximiser fund I.