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What is an ‘asset class’?
An ‘asset class’ is a group of investment instruments such as equity, debt, cash, etc., which have similar investment risk and return profile. Equities comprise of investments in various company stocks and though contain high levels of risk, are the best performing asset over the long term. Debt investments mainly consist of fixed deposits, government securities, corporate debt, etc. These generate a fixed return and generally face lower risk as compared to equities. Cash investments include saving deposits and short term money market investments and are exposed to negligible risks.
What is a ‘risk – return’ profile?
The risk-return profile is the relationship between the risk that an asset class is exposed to and the returns it generates. Generally, higher the risk involved in an asset class, higher is the return associated with it. For example, equity has the potential to generate higher returns than debt, but at a higher risk. Cash on the other hand, though the safest asset class, generates the lowest returns. E.g. An individual who invested in the equity market in April-September 2009 would have generated a whooping 76% returns on his investment but if he had invested in the entire Financial Year 2009 - 2010 he would have incurred a loss on investment of -38%. Further, his investment would have grown at a Compounded Annual Growth Return (CAGR) of approx 23% had he invested for a period of 20 years ending in September 2009. On the other hand, savings in bank will generate a stable return of 3-4% per annum with no downside risk and no upside potential as well whereas value of cash kept at home without investing will keep shrinking over a longer period of time due to inflation.
How do I define my risk appetite?
To determine your risk appetite you will have to consider several factors such as your age, number of dependants, income, future goals, etc. Your risk appetite may not remain constant and change depending on your life stage and financial status.
What is meant by ‘asset allocation’?
The process of dividing your investments across different asset classes is known as ‘asset allocation’. By spreading your investment across different asset classes, you create a diversified portfolio where the loss that you may make on a certain asset class can be compensated by the profits that you make on another. Thus, you reduce the overall risk of your investments.
How should I decide my optimum asset allocation between debt and equity?
Your risk appetite, investment objective and investment horizon will determine the asset allocation between debt and equity. Higher the risk appetite and longer the investment horizon larger will be the allocation towards equity and vice versa. An ideal portfolio should have a judicious mix of various asset classes.
What is market capitalization, and what is the difference between large-cap and mid-cap stocks?
Market capitalization (market cap) represents the total market value of a company. It is calculated by multiplying the number of shares of the company with its current stock price. On the basis of this market cap, companies are segregated into large-caps, mid-caps and small caps. There is however no standard way to categorize the companies on the basis of this value. At BIRLA SUN LIFE INSURANCE, we define mid-caps as companies having market capitalization between US$ 100mn to US$ 2bn. Generally, while large caps are considered to be the present industry leaders, mid caps are the emerging leaders of the future. Mid-caps offer higher risk-return profile than large caps. They rise faster than large-caps in bull markets, but may also fall at the same pace. when the markets collapse.
What are ‘growth’ and ‘value’ stocks?
A ‘growth’ stock is one that has the potential to generate higher returns than the overall market, and deliver substantial earnings. The stock is often traded at a higher value due to the expectation of high future earnings. A ‘value’ stock, on the other hand, is one that is undervalued, and is traded at a price that is much lower than its true worth. The undervaluation can be due to many reasons, for e.g. being in an industry which is going through a downturn etc.
What is the ‘top-down’ and ‘bottom-up’ investment approach?
In top-down investing, overall economic and market environment is assessed to arrive at sectors that are likely to outperform the market. After selecting sectors, specific companies in those sectors are analyzed and chosen for investments. In bottom-up investing, extensive research and analysis is done on individual companies and they are chosen based on their future prospects and not on the basis of significant economic or market cycles. At BIRLA SUN LIFE INSURANCE, we adopt a blend of both strategies.
What is the investment strategy of BIRLA SUN LIFE INSURANCE?
BIRLA SUN LIFE INSURANCE focuses on constructing high quality diversified equity portfolio which is skewed towards large-cap stocks with selective exposure to mid-caps. We invest in companies having clear business plans, scalable business model, efficient & visionary management as well as growth prospects. On the debt side, we predominantly invest in highest rated instruments to ensure better portfolio quality and liquidity.
What is an IPO? Does BIRLA SUN LIFE INSURANCE invest in IPO’s?
When a company approaches the capital market with an issue of shares for the first time, the issue is called an ‘Initial Public Offering’ or an IPO. This process makes the way for listing and trading of the company’s equity shares on the stock exchanges. BIRLA SUN LIFE INSURANCE invests in IPOs of fundamentally strong companies. Prior to investing, BIRLA SUN LIFE INSURANCE conducts an in-depth research of the company with an emphasis on management quality and capabilities. An interaction with the company management is also undertaken to get a better understanding of their business model and future plans.
What are ‘ULIPs’?
A Unit Linked Insurance Plan (ULIP) is a life insurance policy, which offers the dual benefits of a protection for life and investments. The protection element is the underlying insurance cover while the investment element is that portion of the premium that is invested by the insurance company on your behalf in a fund of your choice.
What is the benefit of investing in ULIPs?
ULIP is a unique investment avenue, which helps you fulfill your long-term financial goals. It fosters disciplined investment as it requires you to make investment at regular intervals. Being long-term in nature, it automatically provides a shield against short-term market volatility. It provides flexibility and transparency. Investment portfolios are disclosed on a monthly basis and Fund’s NAVs are disclosed on a daily basis. It offers a range of fund options with different asset allocations meeting the requirement of policyholders with different risk appetite. Investment in ULIP is eligible for tax deduction of Rs 100000 under Section 80(C) of Income Tax Act as per current tax laws
What would be the time period over which one could expect favourable returns from ULIPs?
ULIPs are well suited for meeting your long-term financial goals. The premiums paid by investors (net of insurance charges) are invested in funds as mandated by the policyholders. These funds invest in market-linked instruments such as equity, bonds and government securities. Since the returns on ULIPs are market-linked, they too might get impacted in short term. However, long-term returns do not get much impacted by such short-term volatilities. Over a long-term, one should expect favourable returns from ULIPs.
How should one analyse ULIP’s performance?
To analyse how well your ULIP has fared, compare the returns with the fund’s benchmark and peer group. The peer group should be of funds with similar asset allocation, investment strategy and asset quality (ratings, market capitalization and diversification). For example, a fund with a 20 per cent equity and 80 per cent debt exposure should be compared against fund options with similar asset allocation only.
What is a ‘benchmark’? What is my fund’s benchmark?
A benchmark is an index used by fund managers to compare the fund’s performance and portfolio risk. At BIRLA SUN LIFE INSURANCE, we use BSE100 as a benchmark for equity investments, while CRISIL Composite Bond Index, CRISIL Liquid Index or CRISIL Short-Term Bond Index are used for debt investments.
How often does the BIRLA SUN LIFE INSURANCE investment team churn the fund portfolio and why?
Being a life insurance company, all investments are undertaken with a long-term view. We conduct active fund management and sell stocks if the fundamentals of the company/sector changes, valuations become too stretched or some other investment opportunity looks attractive in relative terms.
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