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A Guide to Choosing Funds for ULIPs on the Basis of Risk Appetite

01-08-2022 |

Unit-linked insurance plan is a unique combination of life insurance and market-linked investment. A single premium is used to provide financial cover to your loved ones in case of an eventuality and for the creation of wealth.

 

The insurance product offers multiple benefits, including a switch between funds, flexibility, partial withdrawals, tax* benefits, etc. But ULIP returns depend on choosing the right fund options based on your risk appetite. Read ahead and find out about the right strategy to choose fund options under a ULIP.

 

How Does ULIP investment Work?
 

 

In a unit-linked insurance plan, the fund manager invests a portion of the premium you pay in equity, debt or a combination of both. The plan offers you the flexibility to choose between the funds according to your investment needs and risk appetite. You can invest more assets in equity funds if you have a high-risk tolerance.

 

On the other hand, investing in fixed income bonds or government securities can be chosen if you are risk averse. The ULIP funds you choose are not permanent and can be altered with the help of the switch feature. As your risk appetite grows, you can incline your investments towards equity by switching between the fund options. Whereas, when market volatility is high, you can switch your investment to more debt funds to gain stable returns.

 
Different Fund Options In a ULIP

You can choose any of the fund options in a ULIP based on your risk appetite and investment goals. The types of funds in ULIP are categorised into low, medium and high-risk, which are as follows:

 

  • Equity funds

    Equity funds are high-risk funds that invest primarily in the stocks of companies. The investments are considered riskier than other options due to market volatility. However, with increased risks come high returns. So, equity fund investment offers handsome returns when the market sentiment is positive.

    Thus, if you have a high-risk taking capacity and wish to generate high returns on investment, you can opt for equity funds investment.

  • Debt funds

    The debt fund option under a ULIP policy comprises investments in corporate bonds, government securities/bonds, debentures and other fixed income assets. The debt instruments offer fixed and moderate returns. So, if you have no relevant market experience and a low-risk appetite, you can invest in debt funds.

  • Balanced funds

    Balanced funds are a blend of low-risk debt funds and high-return equity funds. They help eliminate the market risks linked to equity by investing in fixed-income assets. So, if you have a low to medium risk tolerance and you wish to generate handsome returns on investment, balanced funds are a perfect solution.

  • Cash funds

    Cash funds are liquid funds that primarily invest in money market instruments such as cash/bank deposits, treasury bills, etc., generating steady returns. This type of fund is suited for low-risk tolerant individuals who wish for a safe investment avenue. 

 
How Can You Choose the Right Fund Option in ULIP investment?

 

Choosing the right type of ULIP funds is important. This is because the ratio of funds decides your returns. A wrong combination of fund options and risk appetite can lead to losses instead of capital appreciation. So, evaluate the following before you choose funds under ULIP:

 

  • Risk evaluation is the first essential step before choosing a fund type. So, analyse your risk-taking ability and invest in the fund type accordingly. You can also switch between the funds when your risk appetite grows, or market volatility is low.
  • You need to align your investment goals and fund option to generate adequate returns. So, assess your long-term financial goals and needs before investing in a fund option.
  • Before investing in a fund option, analyse its past performance in terms of returns. Also, keep track of the fund performance so that you can switch at the right time.
  • The market investment makes your money and risk appetite grow. With the growth in your risk appetite, you may want to invest more in equity. So, look for the flexibility and charges involved in switching between funds before deciding on a particular fund option.


How Does Switching And Redirection Help Choose Appropriate Fund Options?


There are two mechanisms of allocating assets to different fund options. They are as follows:

  • Switching

    Switching is the option to change fund allocation based on risk appetite and market performance of funds. The switching feature under a ULIP is free for certain initial switches but is chargeable afterwards. Also, the switch option under a ULIP is tax*-free.

  • Redirection

    Premium redirection refers to the process of allocating your future premiums to one of the funds of your choice that are different from the existing funds that you have invested in. This can be done before the due date of the next premium arrives, as redirection affects only the future premiums and not the past premiums. You can use this process to allocate your future premiums to achieve desired results as per your risk capacity and financial goals.


Tips for Switching Funds in a ULIP

  • Start with more debt investments to avoid ULIP risk initially and generate steady returns.
  • Hold on to the debt funds for a long time.
  • Switch between debt to equity when market volatility is low.
  • Avoid switching funds at every high and low of the financial market.
  • Stay invested for a longer duration to generate high returns.

 

Final Words

 

So, this was how you could choose ULIP funds based on your risk appetite. Following the correct strategy for ULIP investment helps build an adequate wealth corpus to fulfil your long-dreamed goals.

 

Unit Linked Life Insurance Policies are a perfect option if you are looking for a life cover and an investment tool without the need to manage investments separately. Along with the benefits of suitable fund options, switching, and partial withdrawals, the premiums and maturity benefits of a ULIP are tax*-exempt under the Income Tax* Act. So, buy a suitable wealth builder plan with Tata AIA Life insurance company and secure your financial future today. 

 

L&C/Advt/2022/Jul/1750

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA), Tata AIA Life Insurance is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

What does ULIP mean?

ULIP means a unit-linked insurance plan which offers a combination of life insurance and market-linked investment under a single plan. The premium is divided into two portions. One is kept for life insurance cover while the other is invested in the market. 

What are ULIPs what are the risks involved in them?

ULIPs are investment avenues that provide the benefit of life insurance and market-linked investment with a single premium payment. The investments under a ULIP are subject to market risks. But the option of choosing between equity and debt funds allows you to reduce the risks involved according to your risk appetite. 

Disclaimers

  •  Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
  • IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER
    • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.
    • Past performance is not indicative of future performance.
    • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.
    • Please make your own independent decision after consulting your financial or other professional advisor.

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