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 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.
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.
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.