ULIPs offer many benefits to investors. Right from a life insurance cover to market-linked investment opportunities, the ULIP benefits available to investors are many and varied. Among the many beneficial features that ULIPs come with, asset allocation is an important one. To understand what asset allocation is and what the ULIP benefits linked to proper allocation are, let us begin by understanding the answer to the fundamental question - what is a ULIP plan?
What is a ULIP plan?
A Unit Linked Insurance Plan (ULIP) is an investment option that offers the policyholder the dual benefit of investing in either equity funds or debt funds (or both), while also providing life insurance coverage. In simple terms, ULIP provides wealth creation opportunity and a life insurance cover, so the policyholder gets the advantage of insurance and investment.
So, now that you know the basics, let us move on to understand the concept of asset allocation in Unit Linked Insurance Plans, which is the reason for many ULIP benefits.
What is asset allocation?
As you have seen above, ULIPs offer policyholders the choice of investing in different funds. Asset allocation is the practice of allocating the premium paid across the funds offered by these plans, so you can reap optimal ULIP benefits.
Here is a closer look at the types of funds that you can allocate your assets between.
1. Equity funds
As the name clearly suggests, equity funds invest in the equity stocks of companies listed on the stock exchange. Professional fund managers who perform the research needed to identify the best stocks to invest your funds in generally manage these funds. Depending on the category of companies they invest in, equity funds can be of different types, like small-cap, mid-cap, or large-cap, among others. The primary objective of asset allocation in equity funds is to give the policyholder the benefit of market linked capital appreciation.
• Risk factor - Generally high risk investments
• ULIP returns - Typically higher, especially over the long term
2. Debt funds
These funds invest in financial instruments like corporate bonds, government securities, and fixed income bonds. The element of guaranteed returns associated with debt funds adds some stability to your investments. Therefore, if you are looking for investments that come with lower risk, asset allocation to debt funds may be a good idea. This is what makes these funds preferred by conservative investors.
• Risk factor - Generally considered as medium-risk investments
• ULIP returns - Typically low to medium over the long term