From risk to riches: How insurance can pave the way for wise investments

Once you are adequately insured, you can start with investment journey. Investment is a continuous process which must be initiated with the amount befitting one’s future need

Bima, Suraksha Ke Liye Ek Sauda Hai, Mol-Bhav Jaroor Karna.

Nivesh Ek Satat Prakriya Hai, Phoonk-Phoonk Ke Kadam Rakhna.

Translation:-Insurance is a protection deal, must negotiate before you initiate.

Investment is an enduring process, before start, adequately ideate!

Insurance provides you protection against odds. The oddities may come in the forms like, disease, damage to your property, livestock, etc. Even while travelling, you need to have proper insurance cover. Same thing is applicable to your jewellery, money and various other assets like livestock, car and so on.

The insurance is broadly categorised in two kinds, life and non-life (Also known as General Insurance).

While insurers like the sole state-run insurance behemoth, LIC and nearly 25 private sector insurers take care of your life and your kith and kin beyond life provide cover to your health and belongings; there are a host of state-owned and private sector general insurers which are also active on the space.

If you are looking for killing two birds with one arrow by having an insurance cover which takes care of wealth creation too, then you must go for Unit Linked Insurance Plan (ULIP). Buying a ULIP helps you achieve your financial goals. But before embarking upon any ULIP products, do make yourself fully aware of the cost of ULIP together with its components. Take any decision, only after considering on cost and assessment of your needs.

An article published in the Mint dated November 7, 2023, titled ‘It’s a Sham! How to spot the Ulips sold as Mutual Funds’, graphically compared the Returns of MF and Ulips. It has compared returns for 1-year, 3-years and 5-years. The sobriquet aptly given to the chart is ‘Apples (MF) vs Pricey apples (ULIPs)’. The returns appear comparable. The catch lies in a line that is placed in the bottom of the bar chart. That says, “MF returns are net of costs, ULIP returns are not.”

Cost notwithstanding, following points must be considered before buying a policy:

i. Must look for credentials of the company and that of its promoters or sponsors.

ii. Whether sum assured is adequate to provide some kind of financial security to your dependents.

iii. Don’t hide any information required while filling the proposal form.

iv. Claim Process and Claim Settlement History of the company.

v. Please read finer points in the policy documents.

vi. Never hesitate to use freelook period in case you are not satisfied.

There may be numerous other things that could be considered before signing a proposal, but these six are must. Now, the most basic thing to understand before buying an Insurance Policy is to consider its premium as cost to buy future financial security. That should come as an expense on your P&L account and not on the asset side of your balance sheet.

Any financial planning must start with Life Insurance and Health Insurance and annual premium must be apportioned before other expenses. I wouldn’t go into other nitty-gritty which I would be leaving for your financial advisors. Similarly, depending upon requirement, one must go for Loan Insurance, Vehicle Insurance (beyond mandatory part), Travel Insurance, cyber insurance so on and so forth.

Once you are adequately insured, you can start with investment journey. Investment is a continuous process which must be initiated with the amount befitting one’s future need. We often start an investment journey just to oblige our advisor in lieu of fulfilling our needs. This results in ridiculously low investment amount in comparison to one’s investible surplus. In many instances, a salaried person earning salary in lakhs of rupees start an SIP in single thousands of rupees. Of course, one must ideate and understand the nuances of different investment options, before initiating an investment journey, but once convinced once invest for oneself instead of obliging an advisor. I am not diving deep into investment options as many topics of ‘Nivesh Sutra’ already covered that, and many others will follow. Finally, I would conclude by quoting Warren Buffet. “Risk comes from not knowing what you are doing.” All financial products are designed to fulfill certain needs of the customers and miss-selling happens when needs are not matched with product’s features. In most of the cases the investors are the losers. Hence the rule: ‘Caveat Emptor.’

(The writer is Senior Vice President, SBI Funds Management Ltd)

(The synopsis and translation by Kumud Das, who is an educator and journalist)