ULIP is an ideal choice for investors with long-term investment objectives. One should consider all its key elements before investing.
Unit Linked Investment Plans (ULIPs) are excellent products that offer 2-in-1 benefits of investment and insurance within a single plan. Its effectiveness lies in a ULIP offering you the flexibility and ease in every way, right from premium payments to funds selection, switching and partial withdrawal. With the availability of low-cost ULIPs, it has become one of the most lucrative investment choices with high tax efficiency. But, there are always necessary steps each investor needs to take before investing in anything. ULIP investors need to be mindful of these things mentioned to achieve the required exponential growth.
#1 – Opting for the right amount of insurance cover
Since ULIPs offer life cover + investment, the entire purpose will be to have an adequate insurance along with optimized returns on investment for long-term goals like marriage, retirement, children education, etc. These insurance covers also take care of death or disabilities, thus, ensuring that in case the investor deals with an unfortunate mishap, the sum assured or the funds value whichever is higher is paid out to the beneficiary of the plan. Along with securing your goal, you can also safeguard your family; that is the beauty of ULIP. Hence, choosing the correct amount of life cover is of paramount importance. Note, the sum assured is decided based on the premium you pay.
#2 – Choosing the proper mix of asset classes
Like mutual funds, ULIPs also offer a variety of funds (equity debt and hybrid) you can choose from. Choosing the right blend of assets should depend on your investment objective, age and your appetite for risk. If your investment objective is growth, you should choose the aggressive way, that is, more investment into equity funds. On the other hand, you can be conservative by choosing more of debt funds, if your objective is to preserve the wealth. It’s crucial that you make an informed decision when it comes to choosing the asset mix based on your investing style and need.
#3 – Understanding the right time for a switch and its implications
Fund switch is the unique and key feature of ULIPs that provides you with an opportunity to grow your wealth. There are few Switches which are free of cost and it is vital to use the option wisely to get the maximum benefit out of your investment. Your allocation may change over time depending on your age and market condition. Accordingly, you can switch from one fund to another as well.
#4 – Rebalancing your ULIP portfolio based on your risk appetite
In a case of long-term investments, timely rebalancing of the portfolio also counts greatly to diversify the risk. Let’s say you prefer to use the aggressive investment strategy as you are just 30 years old at the time of investing in a ULIP. You may have to change your strategy based on how your life progresses. You need to be intuitive and rebalance your portfolio accordingly as per your needs then. With the advancing age you are subjected to and a changing risk appetite, you can switch from an aggressive allocation of the 80-20 equation of equity-debt to moderate investment allocation of 50-50 equity and debt. Make sure you keep in mind the economic scenario while changing the allocation.
#5 – Knowing the charges before you invest
Earlier, ULIPs were deemed as costly investment instruments with high upfront charges including premium allocation charges and fund management charges. The IRDAI has since then brought in a considerable amount of changes in the charge structure. However, it’s essential to understand the charge structure of the ULIP you are choosing to invest in as the value that accrues often gets eaten away by these charges. Other ULIP charges include mortality charges and administration cost charges.
#6 – Staying invested for a long-term horizon
Volatility is a persistent aspect of the investment market. The market bounces back after every downturn. To get the highest potential returns among such volatility, you need to stay in the market and experience the fluctuations. Staying invested for the long term is the key factor to reducing the volatility effect and witnessing an impressive growth pattern. Remember, a ULIP is designed to meet the requirement of investors with long-term perspectives. You should at least look at your investment goals 10 years along the way. Being a ULIP investor needs you to stay in the game till its maturity to gain maximum benefits.
Conclusion
To make an effective decision, one must be aware of the product they are investing in. ULIPs are ideal choices for investors with long-term investment objectives. Make sure to consider all the key elements and hence, make the most of your ULIP investment. Use the flexibility offered by the ULIP in an effective manner to build wealth for the long run.