4 Ways to Optimise Your ULIP Returns and Be a Smart Investor
A Unit Linked Insurance Plan (ULIP) may be considered to be a financial product that offers a mix of life insurance coverage and investment opportunities. ULIPs may be suitable for those looking to achieve both these financial objectives under one product. In the investment aspect of a ULIP, the funds may be invested in equity instruments, debt ones, or a combination of both. You may have the option to choose which kind of instruments you want in your portfolio.
Regardless of the options you choose, if you have invested in the market, you may want returns on your ULIP, which is subject to market risk. Now, technically, we cannot define good returns for a ULIP. The returns of a ULIP may be subjective and highly dependent on how the funds perform in the market, amongst other factors. Moreover, the meaning of ‘good returns’ may also differ from person to person. A beginner investor may have a different idea of ‘good returns’ than an experienced investor. Nevertheless, any investor may want their invested money to yield results favourable to them.
Therefore, here are some ways you may optimise your ULIP returns as a smart investor. Let’s look at these ways.
Ways to Optimise Your ULIP Returns
While there may be no precise way of predicting what returns a ULIP might generate, the following ways may help you increase the chances of receiving optimum ULIP returns.
● Utilise the fund-switching option
ULIPs may have a unique feature referred to as the fund-switching option, which can be opted subject to policy terms & conditions, wherein the policyholder may switch their funds from being invested into one asset class to another. So, let’s assume you have a majority of your money invested into equity instruments. However, you may feel that the market may soon be undergoing a slump, or you simply do not wish to bear the risks associated with the equity market. Therefore, you may simply transfer the amount from equity to debt instruments.
Similarly, one may transfer their funds from debt to equity to take advantage of a strong market. This feature may allow investors to optimise the market ups and downs and potentially combat the risks associated with market volatility to make ULIP returns in the long run.
● Pay attention to the market
Even though you may have the fund switching option, it may not be that useful if you may not know which asset classes may perform better. Having a general understanding of how the market works and how it may affect your funds may help you make better investment decisions. Hence, you may want to pay attention to the market ups and downs and try to approach your ULIP investment journey with those learnings in mind.
● Invest early
It may be a good idea to invest as early as possible in a market-linked plan. Investing early may allow you to start with smaller amounts which may accumulate into a large corpus over the long term. These smaller amounts may also increase gradually due to the principle of compounding. It may mean that along with interest being earned on the principal amount, the previously earned interest also earns further interest.
Let’s use the following example to understand why investing early may prove more fruitful:
Mr. Saurav invested in a ULIP at the age of 25 years. He invested Rs 15,000 every month until he was 55 years old (30 year’s tenure). The average assumed rate of return on the ULIP was 10%.
On the other hand, Mr. Rushabh was late to the investment journey by 5 years. He started investing Rs 18,000 every month from the age of 30 until he was 55 years old. The average assumed rate of return here was 10% as well.
At the end of their tenure, Mr. Saurav had accumulated a total value of more than Rs 3 crores. Mr. Rushabh, despite investing a larger amount monthly, accumulated a total value of Rs 2 crore 40 lakhs only. # [1]
Additionally, if you opt for a ULIP early, you may not only get the chance to earn market-linked ULIP returns but also enjoy life insurance coverage for a longer period.
# These returns are estimates and not indicative of real performance. The actual results may vary based on multiple factors.
● Invest for the long term
In the above example, Mr Saurav would not have been able to accumulate a larger corpus than Mr Rushabh if he had surrendered the plan before the completion of Policy term. Hence, to optimise your ULIP returns, you may want to stick to a long-term investment horizon. If you need money from your investment plan, you may make partial withdrawals, subject to policy terms & conditions.
How Much should you Invest in a ULIP?
To know the suitable amount for investing in a ULIP, you may have to look at different factors, such as your goals, your current income, the expected rise in your income, the tenure suitable for you, and so on.
Moreover, your risk appetite should also be taken into consideration. You may receive higher returns with equity instruments, depending on the market conditions, among other factors. However, that may also mean that you have to bear a higher amount of risk as well. Safer, conservative options may mean lesser risks but may lead to relatively lower returns.
You may use a ULIP calculator to determine the estimated amount that you may be able to invest for receiving market-linked returns with your ULIP. Regardless of which option you choose, remember that investing in a market-linked plan may mean that your money is subjected to market fluctuations. Hence, consulting a financial advisor may also help you make a decision that is beneficial for the present and in the long run.
Sources:
1. https://groww.in/calculators/sip-calculator
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