Do you have an appetite for adventure when it comes to investments, do you love taking risks? If yes! Then here is a news flash for you: Let's start with the good news - the higher the risk the higher the return! Now for the bad news - higher risk can also mean no return or negative return!
What a damper! Certainly spoils an honest-to-goodness hard-working family-man's appetite for high risk investments. When starting life as a responsible adult (usually happens once you get married and have kids to support), the first responsible thing to do is financial planning. And the first lesson you learn (as a layman in financial matters) under this subject is how to make your money grow, the second lesson tells you all about the instruments of investment that can be used to grow the money - and last but not the least, one learns about how to decide on the right investment instrument with the aid of the wealth pyramid. In this article we will analyze the ULIPs and ELSSs based on the wealth pyramid theory, in order to rate the 'appetite for risk' required for investing in either of these schemes.
The Wealth Pyramid
A wealth pyramid goes a long way in helping you to keep your appetite for risk in check. A time-tested concept in the investment arena; the wealth pyramid positions common investment instruments according to the returns they offer. The pyramid base always indicates the most stable investments that translate to lower returns, whereas, the pinnacle of the pyramid denotes the highest risk investments that may either deliver the highest returns or no returns.
So when in doubt, use the pyramid model to discern between a stable verses risky, investment instrument.
ULIP Pyramid Score
ULIP stands for unit-linked insurance plans, these offer investment units, e.g. mutual funds etc. plus life insurance coverage to the investors. Under this plan you have to pay a fixed amount every year (monthly, quarterly, half-yearly or annually) for at least the first three years of the policy. Part of the premium you pay will go towards administration charges; the rest will be invested in assets like equities/ debt, etc. as per your choice.
ULIP also allows the investor to move money from high-risk equities to debts or vice versa, anytime during the policy's continuation. Moreover some insurance companies also offer ULIPs with a capital guarantee that shields the investor's premium in case of a market slide. And let's not forget the tax benefits under Section 80C; just another plus for the ULIP. As a result of all these stability / safety factors, ULIP returns are on the lower side. This places ULIP firmly at the middle of the Wealth Pyramid.
ELSS Pyramid Score
ELSS stands for equity-linked savings schemes; these offer a diversified equity mutual fund scheme. Under this plan you have to make the investment at one-go and it is locked in for three years. You also don't have the choice of investing in debt instruments. Investment is purely restricted to equities.
Furthermore, an ELSS is not subjected to administration charges while it also enjoys tax benefits under Section 80C. So if your aim is to save taxes through investment and make a tidy profit at the same time, then ELSS is just what you need. But alas, there is no safety net for ELSS schemes that do not perform well. Consequently, this places ELSS at the pinnacle of the Wealth Pyramid.
Final Scores
Appetite Factor Rating for ULIP's: modest appetite for risk - mostly for the timid man.
Appetite Factor Rating for ELSS's: sizable appetite for risk - definitely for the macho man!
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