ULIP# plans are often seen as investment products with some risk because their returns depend on how the market performs. But the level of risk can change depending on the type of fund you choose.
So, investors have different options, some may have higher risk with chances for bigger growth, while others may be safer with more stable returns. ULIPs usually let you invest in three main types of funds like equity, debt, and cash or liquid funds, each with its own level of risk, tax rules, and investment time.
Also, ULIPs combine investment with life insurance cover and may offer tax benefits and some flexibility for different financial goals. They can be one of the options for those who want both growth and some protection.
What is ULIP Insurance?
The acronym ULIP stands for Unit Linked Insurance Plan. ULIPs is a life insurance product that combines the advantages of capital growth and life insurance coverage.
ULIP stands out as one of the preferred financial products in the market. It serves many objectives, such as offering life insurance coverage, wealth accumulation, creating retirement income, and funding the educational expenses of children and grandchildren.
ULIP policyholders are required to make regular premium payments, which serve the dual purpose of covering insurance and contributing to investments.
Frequently, people purchase ULIP insurance with the intention of benefiting their heirs. In the case of a life insurance ULIP, the designated beneficiaries would receive payouts upon the owner's demise.
Types of Funds in ULIPs
The potential investment risks linked with ULIPs do not depend on a single kind of fund option. It is a mixture of the combined risk level of the fund types that you decide to invest in.
Equity Funds
Equity funds are high-risk investments and include investments such as buying shares of companies. The change in the stock market directly influences the prices of the share, and hence, equity funds are suitable for investors willing to take higher risks.
Debt Funds
These funds, also referred to as bond and income funds, carry a moderate level of risk and primarily invest in fixed-income and debt instruments such as corporate bonds, government bonds, and securities.
They usually have a medium level of reward potential and an equity exposure ranging from 20% to 70%.
Balanced Fund
This is the most stable and preferred type of ULIP, blending equity instruments like company stocks with fixed-income instruments like bonds, resulting in a medium to high-risk profile.
Unlike the previous two options, a balanced fund focuses more on insurance and systematic wealth creation, with pre-defined limits for equity and debt investments, typically in a 50:50 ratio.
Liquidity Funds
Liquidity funds are low-risk in nature as they prioritise short-term market components such as bank deposits, commercial papers, and treasury bills.
These funds are suitable for individuals who are unwilling to take risks with their money in equities or bonds.
Why are Investment Risks Necessary?
ULIPs is a popular choice due to their flexibility, allowing investors to adjust their investment preferences throughout their investment. For example, you have the option to switch between equity funds, debt funds, and liquidity funds based on their specific investment objectives.
When choosing an investment, you are likely to think about two key factors: the level of risk associated with the investment and the anticipated returns from the investment.
It is commonly believed that there exists a direct correlation between the potential risk and the return on any investment. The greater the potential for returns, the higher the associated risk.
This is precisely why safer investments, characterised by minimal risk, such as government bonds, tend to yield moderate to low returns. On the other hand, highly risky investments have the potential to provide very enticing returns.
Who Will Bear the Investment Risk in a ULIP Plan?
As per the official IRDAI guidelines, in a ULIP, the investment risk lies with the policyholder. Even during the settlement period, the policyholder continues to bear the market-related risk since the remaining balance stays invested in the segregated fund. The fund’s value may fluctuate, increasing or decreasing, based on the performance of the financial markets and the chosen fund portfolio.
How to Manage Risk in ULIP Plans?
The top-most discussed strategies to manage the ULIP risks in the volatile market are fund switching, automated portfolio balancing, and systematic investment.
Fund Switching
This strategy allows you to protect your investments from market fluctuations and increase returns by balancing your investment portfolio between debt and equity.
For example, if you foresee a dip in the stock market, you must switch a large portion of your investment to debt/liquid funds, and switch them back to equity.
Automated Portfolio Balancing
Let us say you have an investment portfolio with an equal distribution of both Debt and Equity. However, market fluctuations can alter this ratio, potentially increasing or decreasing your risk exposure.
For example, if you first opted for a 50:50 ratio for your portfolio, but due to market dynamics, that ratio has shifted to 70:30, the system will automatically carry out the purchase and sale of securities to restore the original 50:50 allocation you desired.
Systematic Investment
Systematic investing refers to consistently and periodically adding funds to your investment account or a particular asset.
When you are investing in an equity fund, consistently contributing a fixed amount can effectively lower your investment risk. This approach mitigates the impact of stock market fluctuations and aids in reducing your average investment unit cost.
Final Verdict
A Unit Linked Insurance plan combines insurance coverage with investment opportunities. It is generally recognised as one of the top saving and investment instruments, enabling you to optimise your investment returns.
Overall, when contemplating market-linked2 investments, it is crucial to time the market accurately. Tata AIA ULIP Insurance serves as an excellent investment tool that offers life coverage and provides tax* benefits.
Generally, ULIPs encompass various fund options, spanning from equities to bonds. Depending on your risk tolerance and informed market analysis, you must devise an investment strategy.
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