There is a saying – “Don’t put all your eggs in one basket”. Similarly, in your investments too there is a need for diversification through investment in different product categories. One of the key lessons learnt from the market volatility during the recent Covid-19 pandemic and past market downturns has been to diversify risk and have a more balanced portfolio--to help achieve your long-term investment goals.
A mix of guaranteed and market-linked products
A guaranteed insurance product is a fixed income-oriented product, that provides a guaranteed fixed rate of return throughout the tenure of the product (irrespective of it being a single premium or regular premium product), besides also providing an investor with insurance cover. Therefore, there is a predictability of return from the product, unlike market-linked products—where returns vary depending on market movements.
Market-linked products may be more rewarding for customers over the long term, but they also come with intermittent volatility due to the inherent nature of the product. Therefore, a combination of guaranteed return products and market-linked products may help to construct a balanced portfolio, by diversifying risk, and helping to reduce volatility in the overall portfolio, especially during periods of market correction/downturns. This could make the investment journey more stable for the investor, and help to achieve their investment goal, by providing some buffer.
Let’s assume an investor makes an investment into an equity market-linked product to help achieve their son’s education goal after a 10-year period. His/her equity portfolio has performed well and compounded the investment, but in the ninth year a large market downturn happens like that seen during the global financial crisis in 2008 or the recent Covid-19 pandemic market correction.
This would reduce the portfolio value and may jeopardize in achieving the investor’s goal as he/she may not be willing to exit the investment then and wait for the markets to recover. However, the investor also had some foresight and purchased a guaranteed insurance product, where he/she is assured of a fixed rate of return, and the predictable cashflow from that helps to provide buffer to the portfolio—and may help him/her to achieve the investment goal, amidst the market volatility.