Demonitization and ULIP

Demonetisation and Market Volatility Leads To a Fall in ULIP Surrender in FY16

The demonetisation move resulted in the fall of the values of ULIPs in 2016. Here is what you need to know about demonisation and ULIPs.

Demonitization and ULIP

On November 8, 2016, at 8 PM, Narendra Modi, the Prime Minister of the Republic of India, announced the demonetisation of currency 500 and 1000, which were in circulation in the country. This was a bolt out of the blue that was unexpected and beyond anyone’s comprehension.

In an emerging economy like ours, demonetisation ended up creating a manic chaos among people, causing a severe disruption of business. But, as the government ensured that this was a short-term pain for the long-term benefit of the country.

He also revealed the main reason for demonetisation to be the efforts to restrict black money within the growing economy. To stop terrorist funding activities and to eradicate a destructive parallel economy.

However, the demonetisation move did usher in a certain unease among people. This is because, everyone in some form of the other invests in stocks through ULIPs, SIPs, etc. The worry caused by the induced volatility of the stock market might force an investor to withdraw from their investment plans and further make investments in risk-averse options like bank FDs, government bonds, etc.

Considering the case of ULIPs, Unit Linked Insurance Plans (ULIPs) are life insurance products. There are two types of life insurance products. One is the traditional plan in with fixed rate of return.

The investment is made in government securities and bonds, and the other is the ULIP. Wherein the money is invested in the stock market to maximise the returns on investment. Along with providing insurance cover to the person holding the policy.

ULIPs give you an opportunity to invest in sectors like realty, construction, consumer durables, banks, automobiles, etc. They have a lock-in period of 5 years, before which you cannot surrender the policy.

Tax benefits can be enjoyed on premiums paid as well as maturity proceeds. While investing in ULIPs, you should ignore the short-term noise of the market, as it has long-term benefits. Investments made for a long term enjoy the power of compounding. It can reap significant benefits from the investments made.

The fear of the unstable market would push people to surrender ULIPs was what many predicted. However, an opposite reaction was noticed, and there has been a fall in some surrenders in ULIPs in the year 2016. The negative impact on a few sectors might be possible for the short term. But in the long run, it will yield significant returns on investments.

Let us evaluate how the markets of a few sectors will react to this move, and why is it wise to not surrender your ULIP.

The Real Estate Sector

The constant rising value of the estate was making it tough for the common man to afford a house. Due to this move, the reality estate prices are expected to fall. Resulting in an increase of purchasing power as buying a house will be easy for the salaried and middle-class.

The Banking Sector

Banks are expected to receive cash inflows with account deposits. But also from the millions of Jan Dhan accounts. It was encouraged by the government to be opened before the demonetisation move. The fall in banking stocks are temporary and will rise in the coming times.

The Infrastructure Sector

Infrastructure assets, which help in the building of bridges, dams, highways, etc., will emerge as one of the best gainers. This is because it depends on the government’s spending capacity.

The Automobile Sector

The impact on revenues is going to be less. The revenues might fall in the short term, but in the medium and long term, the impact seems less.

The Pharma Sector

As medical stores accepted the Rs. 500 and Rs. 1000 notes till mid-December. People were starting stocking up medicines for 4-6 months. Thus, increasing the revenue of companies. However, in the long run, there will be no impact of this move as the demand for pharmaceutical company products.

Demonetisation effects will be there for several quarters, Let’s see whether it yield the desired result.

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