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How to Invest in ULIP to help Maximize Market Linked Returns?

How to Invest in ULIP to help Maximize Market Linked Returns

How to Invest in ULIP to help Maximize Market Linked Returns?


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Aug 05, 2021

By : Bajaj Allianz Life

Uncertainties in life can crop up when you least expect them. But while you may not have seen them coming, you can still be prepared for these emergencies with life insurance by your side. In addition to being financially equipped to handle these uncertainties in life, there are also several other life goals that you may have planned out. For instance, you may want to buy a home of your own, or pay for your child’s college education. Or, you may want to save up a significant corpus, so you can retire wealthy. Here is where investments can help.

So, insurance and investments - two things you need to secure your finances and meet your life goals. Wouldn’t it be great if there was a product that gave you both these benefits? Turns out there is such a product, and that is the Unit Linked Insurance Plan - or ULIP. You can get a life insurance cover while simultaneously ensuring that your investments generate market-linked returns.

And the ultimate goal of all investment is to maximize your returns, isn’t it? So, how to invest in ULIPs to help maximize the market linked returns? To understand this, let’s first take a look at what ULIPs are all about.

 

What is ULIP?

 

ULIPs are simple life insurance plans that also come with an investment component. The policyholder purchases a ULIP that meets their financial needs and life goals. And, just like with all kinds of life insurance, they pay a premium to the insurance provider. The unique thing about ULIPs is their investment component, which allows policyholders to create market linked wealth over the investment period, if they invest smartly.

 

How ULIP works?

 

ULIPs work in a very straightforward manner, and once you understand the details, it will be easy enough to get a better idea of the working of this kind of life insurance plan. Basically, ULIPs have an insurance component, and an investment component.

In the insurance component, the policyholder gets a life cover that remains valid throughout the policy term, as long as the premiums due are paid on time. In case the policyholder passes away during the policy term, their nominee receives the death benefits guaranteed under the ULIP plan.

As for the investment component, it includes a variety of funds that come with varying levels of risk, ranging from very high risk to very low risk. Policyholders can choose from these funds, and can make up their investment portfolio with equity funds, debt funds, or a mix of both. If you are buying a ULIP, make sure you consider your life goals, your risk appetite, the market conditions and your family’s needs before selecting your fund mix.

Over the policy term, as you age, your risk tolerance will also undergo a change. And with time market fluctuations may also occur. You can account for changing risk tolerance and also take advantage of market movements with the fund switching feature in ULIPs. With this feature, you can switch all or a part of your investments from equity funds to debt funds, or vice versa. At the end of the policy term, upon maturity, the returns are paid out to the policyholder based on the prevailing ULIP NAV (net asset value).

 

What is a good time to invest in ULIPs?

 

Now that you know what a ULIP is and how it works, it’s time to see when and how you can invest in these plans, so their return generating potential is used optimally. Here are some ideas that can help you maximize your ULIP returns.

 

1. Invest early in life

 

If you invest in ULIPs when you are younger, you generally tend to have a higher potential for taking risks. This allows you to take advantage of the equity market by investing a larger portion of your corpus in equity funds - which are generally ‘high risk high reward’ investments. That way, you can get started on the journey to market linked wealth creation much earlier in life. And this kind of a head start helps you to maximize the market linked returns from ULIPs over the investment period.

 

2. Remain invested for the long term

 

When you invest earlier in life, you get to remain invested over the long term. This means that you get to take advantage of the power of compounding, which works better the longer you remain invested. Compounding is simply the reinvestment of the returns generated, so they generate additional returns over time. This further hastens the wealth creation process. With ULIPs, there is already a 5-year lock-in period. Plus, ULIPs are typically long-term investments, so you can take advantage of compounding.

 

3. Invest consistently in ULIPs

 

Another way to invest in ULIPs to maximize the market linked returns is to remain consistent with your investments. By doing so, you can make use of the rupee cost averaging phenomenon, which reduces the overall cost of investment over time. So, eventually, that helps maximize your returns. Additionally, to invest consistently in ULIPs, you only need to shell out small amounts of investment each time.

 

Conclusion

 

This should give you a good idea of how you can invest in ULIPs to help maximize the market linked returns. Keep in mind that it’s always a good idea to periodically revisit your investments and ensure that they are still aligned with your life goals.

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The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.