ULIPs provide a unique flexibility to its customers to choose various funds options depending on his risk appetite and investment horizon.
ULIP or the Unit Linked Insurance Plans are the combination products that gives life coverage along with investment benefits. These integrated financial instruments are accepted widely due to the inherent benefits of flexibility, liquidity, low associated charges, tax benefits, transparency, risk mitigation as far as maturity benefits are concerned along with the assured death benefits to the beneficiary in case of any unfortunate death of the policyholder. Many financial companies offer ULIP to their customers and extend the dual benefit.
The long-term lock-in period of ULIP gives a bigger return on investment for the customers. The biggest advantage of ULIP is the flexibility when it comes to investment. The customers have the option to invest in stocks, bonds and mutual funds. The investment decision is taken based on the risk sensitivity of the customer. However, ULIP provides the flexibility to the customers to switch between funds to optimise their investments based on the market condition and risk factors.
Different Fund Options in a ULIP
One of the most important features of ULIP is the flexibility to choose funds. Customers can select stocks, mutual funds and bonds to invest depending on the risk-taking capability of the customer. Also, there is fund switching feature which makes ULIP a popular financial instrument. There are a wide variety of funds offered by ULIP, and the investors and policyholders can select from those based on their requirements and risk-taking nature. Those funds are either at low risk, medium risk or high-risk funds. The different fund options are as follows:
- Cash Funds – These are the money market funds with the low but safe return. These funds invest in mutual funds and hence, low risk, steady return funds. People who are risk averse and requires safe and easy investments, cash funds work best for them.
- Income funds – These are fixed interest funds as well as bond funds which contain both secured and unsecured investments of varied proportion as per customer requirements. These funds mainly invest in debt funds, corporate bonds, Government securities and associated instruments that generate fixed income. These are higher in risk quotient and gives moderate return on investment
- Equity Funds – These funds mostly invest in corporate stocks. Since stocks are subject to market risk and company risk, investing in equity funds involves high financial risk. Equity funds give higher return when the market goes up. However, a close monitoring of the equity funds is required, and the customer should be knowledgeable about the market and investment aspects to optimise the fund performance
- Balanced Funds – these funds combine the low return fixed interest funds with high return-high risk equity funds. In this way, these funds generate moderate and guaranteed returns and mitigate the market risk potential. Overall, these funds are medium risk options
While buying a ULIP Policy, the customer should consider certain factors while opting for a specific type of fund.
- A comparison of the ULIPs that are offered by different insurers will allow getting the best fit one
- Purchasing ULIP should be aligned with the personal investment goals like building corpus, kid’s education, retirement plan or similar milestones
- The policy should have the required flexibility to switch the fund options as well as the flexibility in live coverage selection, premium amount and the selection of riders.
The impact of switching fund depends on two factors:
- The insurer offers either the fund value or the sum assured. In any case, mortality charges are considered as the difference between the sum assured and the fund value. So the amount of insurance cover depends on the value of the investments. Though switching in the initial years will not affect the coverage for insurance, it is a better idea to switch to bonds for investments towards the maturity to avoid much fluctuation and uncertainty in the fund value
- In case the insurance and investment pay-outs are separate – In such cases, mortality charges are based on the total sum assured which is decided at the time of purchasing the policy. Here, switching the investments do not affect the insurance coverage at any point in time
Keeping a track on the performance of funds is essential to derive benefits of switching between the options. And the freedom to select the funds to invest makes ULIP popular financial tool to the investors. However, the insurers charge a certain amount for switching the funds, so it is imperative to evaluate the different aspects of risk, return, type of plan and so on before switching your investment.