Last Updated on June 6, 2021 at 9:47 am
Many of us have in this situation before. A reader who wishes to be anonymous writes, “Dear Pattu Sir, I need help with two issues. First, I understand why we should not mix insurance and investment, but my father forced me to buy a LIC policy with an annual premium of about Rs. 50,000. The second premium payment date is due. I know I have to stop it, but I am worried about the loss of 50K.”
“Also, I have started investing a small amount in UTI Nifty Index Fund via SIP. I can invest a bit more, but I am scared of market volatility. How do I overcome the fear of losing the premium, and how do I get used to market volatility.” The reader later clarified that he could inevst Rs. 10,000 a month but is only investing Rs. 1000 each month in the UTI fund.
Both problems are extremely common. This is how most of us would have started our investment journey. Once you realise what needs to be done, getting there becomes that much easy. So the reader has already completed half the journey.
Regarding stopping a one-year LIC policy, if you do not have dependents (our reader dopes not), there is no urgency in getting a term insurance policy. You can get it once the existing policy is terminated. However, for those with dependents, getting a term insurance place before terminatiing the policy is essential.
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Now, Facebook group Asan Ideas for Wealth owner Ashal Jauhari has the perfect response for the first problem (stopping the policy): Would you rather lose a finger or amputate an arm? Meaning, now that a bad product has already been purchased, there will be a loss whether you stop paying premiums or continue the policy.
If you stop paying premiums, you lose the first premium (in this case) and get nothing back. This is like losing a finger today. If you continue paying the premium for years and years and get peanuts for it, you have let the bad decision spread, take root, and lose an arm tomorrow. Which is better? You cannot beat Ashal’s logic!
Once we have understood the need to invest in equity, the way we look at loss needs to change. You have already made two smart decisions. First, choosing an index fund and starting a small SIP.
Here is a simple exercise that you can try to have a long term -view of risk and reward. Here are the monthly returns of the UTI Nifty fund over the past few months: -2.47%, 6.7%, 1.15%, -0.38%, 6.7%
Suppose you have Rs. 1000 invested five months ago, your investment value would have fluctuated like this: 1000 –> 975.3 –> 1040.6 –> 1052.6 –> 1048.6 –> 1118.9. This may not seem like much. In your fifth year of investing. You would have about 50K as the fund value.
If you encounter a -2.5% return, then you lose Rs. 5000, which is 5 months of SIP. If the market falls by 30% as it did in March 2020, you will lose 15000. This is the equivalent of 15 months of SIP investment. The opposite will happen if the market gains 30%.
Today you are worried about losing the annual premium of 50K a year. But, if you keep investing in equity, you will soon lose or gain 50K a year; lose or gain 50K a month; lose or gain 50K a day.
Having started from the same position as you are now, I can tell you, once you embrace and accept the loss as an unshakable part of growing wealth, not only will you get used to it, you will look forward to it!
The sense of accomplishment would become the same whether you lose or gain a few lakhs a day. Equity investing not just patience and discipline but also an equanimity to accept gain and loss as inseparable.
So tell yourself that you will soon be gaining or losing 50K a day. So why bother with 50K a year? Will discipline, a simple investment strategy and some luck, you will more than makeup for this loss many times over.
If you think the premium loss is a real loss and the market loss is notional, there is no such thing as a notional loss. All losses in the stock market are real whether we redeem the money or not.
So stop paying the premium with confidence and focus on gradually increasing your equity investment. You will meet loss and gain daily there. There is no need to start additional SIPs. You can invest on your own each month (the date does not matter!)
Anyone battling this kind of a problem, “should I stop premium or continue” should ask themselves the question that Ashal put so eloquently: What is the real cost of continuing? If you stop, the loss is quite real, but small and you can easily compensate it with a goal-based asset allocation. If you continue, the loss is again real but much larger, and you will never be able to make up for it.
As for investing in equity, start small but tell yourself that you are going to become wealthy. You are going to make crores (after a couple of decades – what’s the rush?!) will huge daily losses and gains. If you don’t do this, you can never change your lifestyle. I wish you all the best.
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