ULIP is perfect investment tool for someone who just wants to invest their money with a mid to long-term view can park their money in this instrument.
Unit Linked Insurance Plan has gained lots of popularity over the past few years. Many factors play a crucial role behind the same. Revised regulatory changes, the changing landscape of bank based investment options and reduced costs of operation make ULIPs, a product worth investing time on. For all those who are unaware, ULIPs are insurance based investment options. Meaning, they provide the best of both worlds.
While your money works hard to give your better returns, it is also safe guarding you against unknown situations from the future. Unlike simple investment tools, unit linked plans invest a portion of the premium amount as insurance. Your policy premium pays for your insurance, and the remaining amount gets into the fund bucket. The funds are of your choice, and so is the breakdown of it.
This is one of the biggest benefits of choosing a Unit Linked plan. As you have the power of deciding your risk exposure, funds with higher exposure to the capital markets fall in the top risk category and vice versa. It is then left up to you to decide how much risk exposure you want in your portfolio.
The most aggressive portfolio would have 100% of the funds allocated to equity funds. A moderate portfolio usually has about 60% of the premium amount invested in equity funds. While a conservative portfolio would contain 100% of the portfolio in debt funds.
Risk is a term that keeps coming up invariably during discussions of investment. Thus, it is essential that one understands what risk is and its different types. Any uncertainty in the return rate of any investment cites it as a risk. Higher risk higher gain is one of the most commonly used phrases in the investment world. Any positive or negative deviation from your expected return numbers is a risk.
A Unit linked plan connects it to the capital market, and that is where the risk seeps in.
Any funds dealing with the capital market have fluctuations on a regular basis. The NAVs of the funds might go up or come down, depending on the equity market or even with changes in interest rates. This is one of the primary differences between ULIP and other insurance products. There are no guaranteed returns and the risk factor if for the customer to bear.
One of the most common ways of selling investment tools to people is by showing past performance. Better previous results make plans look more lucrative. However, they merely reflect the past and do not indicates what is in store for future. It is almost impossible to predict the future of investment tools.
Risk of Liquidity
Unit Linked plans usually have a minimum lock in period of 5 years. So, if you run into any emergency within that time frame and wish to withdraw the amount, you will lose out some money. On surrender of the policy prematurely, you end up paying additional charges which eat up into returns.
ULIPs are usually tagged along for higher charges which again add some risk to it. If the capital market goes down, the fund value and in turn portfolio value also goes down. But with higher costs, it comes across as a double whammy.
Is it for you?
If you are someone who has a high-risk appetite you can consider ULIP. You can slide the risk factor from 0% to 100% equity exposure, giving you flexibility and lots of control. ULIPs are not restricted to risk factor alone. If you are paranoid about your investments and need to check them on a timely basis, ULIPs are for you. Almost all the insurance companies allow you to monitor your plan closely. There is an underlying reason behind that. Unit plans enable you to switch between different funds. If you feel your money isn’t growing fast enough, you can switch to a different fund.
A ULIP is perfect investment tool for someone who just wants to invest their money and leave it. Anyone with a mid-term to long-term view can park their money in this instrument. Because they provide a wide array of funds to choose from, it caters to people from different life stages as well.