By Benji Foo
Inflation recently has reached unfriendly rates. The meager interest returns in the banks thus subjected to high inflation rates have caused investors to start looking for new avenues to park their hard-earned or excessive cash. There are various ways to do that. The main ones are either lending investments or ownership investments. Lending investments include bonds, treasury bills. Ownership investments would cover small businesses and real estate as well as company stocks.
However, all these investments are not risk-immune. For lending instruments, if the company that you have lent your money to goes bankrupt, either all or part of the money will be lost in the process. Of course, not forgetting that climbing inflation rates may reduce the values of your lending purchases tremendously as the returns on these bonds or treasury bills are only slightly higher than the interests on the deposits in the banks.
Ownership investments like small businesses and real estate are still safer bets for investors. There is still a considerable amount of money to be made in these areas. Shares or stocks of a particular company become completely worthless if it closes down or is bankrupt. Furthermore, a myopic view on the investment of stocks may be detrimental for many, not forgetting the immense amounts of time and energy used to monitor the shares.
We are always looking for diversifications for our savings. Investment-linked policies are one of the safer avenues which also give higher returns than banks or bonds. They are described by some as the hybrid of hybrids between lending and ownership vehicles. It allows for diversification of savings. People who have savings earmarked for a longer period of time might consider this mode of savings. Investors either inject their savings at regular intervals or in a single lump sum. As nothing comes for free, a small part of the investor's money will go into insurance. The balance, depending on the insurance company, goes into investments. Most insurance companies today will invest in mutual funds which are professionally managed, thus requiring no effort whatsoever on the investor's part to monitor the performance of these funds, including buying or selling. Usually, the insurance companies have already picked out the "elite" funds from the vast jungle of funds. Currently, the main types of funds available in the market are money market, bond, stock, global, index or specialty funds.
Selecting the funds to invest will be much of a headache. Be sure to read the prospectuses and yearly reports of the funds. The funds' investment objectives, performance history and costs will be summarized in the initial pages of the prospectus. Some advisors in mutual fund companies, when you require assistance, will be selling the funds which give them higher commissions. They will be encouraging these funds even if the returns are not as good. This differentiates the advisors in most insurance companies. Insurance advisors will not be pushing funds which pay them well as the commissions earned are from the policy itself, not the funds. Insurance advisors, who are savvy, will be recommending better funds. True enough, the advisors get paid commissions through the invested amount of customers, but there are companies which are giving the advisors commissions without using the money injected by the clients. There will instead be a lock down period of the money. The investment returns will thus be higher too as historically, the interest rate returns for investments, increases with the longer time period, as a hedge against market volatility. Since we are already at this topic, I shall let you in on a little tip. If all the funds' performance seems to be good, divide the allocation of the funds equally. This process will usually pay dividends to investors' wallets.
Other than the considerable returns that the funds invested will give, the policy, as mentioned earlier, provides the holder with insurance as well. This can be used as a guaranteed investment return because the amount of coverage would have been agreed upon, at the start.
As you may have already guessed, other than the insured amount, the returns on investments are not guaranteed. That is where the advice of the professional financial consultants will come into play. Unless there is a portfolio change, in the long term, the investor will be able to enjoy good dividends on her investments. For investments at regular intervals, dollar cost averaging (DCA) plays a very powerful part in ensuring good returns. In a nutshell, DCA means lowering the average cost of the funds over many years and getting good returns after the investors sell the funds after a number of years, not months.
To beat the ultra-low returns from banks, this is one of the best bet for investor's money. In any case, inflation will also erode the value of money put away in a bank.
Financial markets will usually reward investors for accepting risks and uncertainty. Investors who are also willing to wait for a longer period of time will never be disappointed.
Investing through investment-linked policies is one of the better avenues to diversify your savings. Why not invest and pay yourself first? In the long term, you will be rewarded for your patience.
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