Know Why ULIPs Do Not Invest Only In Equities
Unit Linked Insurance Plans (ULIPs) are investment-oriented policies that help you invest in different asset classes and earn market-linked returns.
Myth – ULIPs are solely an equity investment
When it comes to ULIP investments many people believe that ULIPs invest only in the equity market. As such, when the markets are volatile, a ULIP plan can be a risky investment. However, this is a myth. There is a whole other world of asset classes that ULIPs help you invest in, giving you the choice to invest as per your goals.
Reality – ULIPs offer a range of investment funds
In a ULIP, there are different types of investment funds. These funds invest in a range of asset classes apart from equity. Have a look at the types of funds that ULIP investments offer –
Type of fund
Securities that the fund invests in
Invests primarily in equity and equity-oriented securities
Invests primarily in debt instruments, i.e., fixed-income instruments
Balanced or hybrid fund
Invests in a combination of equity and debt instruments
Liquid/Cash/Money Market Fund
Invest in liquid assets such as money market instruments and short-term debt securities
A brief look into debt and equity funds
While ULIPs offer both equity and debt funds, let’s understand what these funds are all about –
1. Equity funds:
Equity funds, as the name suggests, invest predominately in stocks listed on the stock exchanges. Since these funds have high equity exposure, they carry a high-risk profile. Equity funds are commonly known as Large Cap, Mid Cap, Small Cap & Multi Cap/Flexi Cap funds depending upon its exposure to market cap. Historically, it has been seen that the equity funds have outperformed other asset classes in long-term therefore these funds have the potential of generating high returns over the years.
2. Debt funds:
Debt funds are less volatile compared with pure equity oriented funds. These funds invest in wide range of fixed-income securities that include bonds, Government securities, money market instruments, etc. Since these instruments pay a fixed rate of interest, they are less prone to market volatility. However, credit quality of the fixed income security and prevailing market interest rate cycle may impact debt funds return. Debt funds carry a low volatility risk and may offer low yet stable returns. So, if you are risk averse and do not want to invest in equity, you can always opt for a debt fund that a ULIP plan offers.
The switching benefit
There’s another feature under a unit-linked insurance plan that allows you to opt out of equity investments if you want to avoid risks. This feature is called fund switching. Switching means changing between the available ULIP funds. If you have invested in an equity fund and the market turns volatile or starts falling, you can transfer your investments to a debt fund to keep them stable. This transfer of investment is called switching and it is available under unit-linked plans depending on the terms and conditions of the policy.
Switching, thus, lets you change the funds in which the premium is invested under ULIP, whenever you need. few of the benefits of switching are as follows -
- You can switch between funds of your choice when required
- Some insurers may provide infinite free switches while some may provide a fixed number of free switches
- You can switch your investment in any proportion. This means that you can switch a part of your fund value or the entire fund value to another fund at your discretion
- You can also choose multiple funds to switch your investment. For instance, if you have invested in an equity fund and want to switch, you can switch to a debt fund or to a debt fund and a balanced fund depending on your needs.
- There is no tax implication on switching between funds.
The premium redirection benefit
While switching allows you to change between investment funds, there’s another feature that allows you to direct your premiums to another fund, besides equity. This is called the premium redirection feature. Under this feature, you can choose to redirect your premium to another fund subject to policy terms & conditions.
For instance, say you choose the equity fund when buying the policy. Later on, you can choose the premium redirection feature and choose to invest future premiums in the debt fund. In this case, from the next year, your premium would be invested in the debt fund, not the equity fund.
The bottom line
Different investors have different risk profiles and investment strategies. Equity investment might not be preferred by all. That is why ULIPs allow a variety of investment funds for you to choose from. Moreover, the flexible benefits of switching and premium redirections help you manage your investments as per the changing market conditions and investment strategies.
So, explore the different ULIP funds that are available under the ULIP policy and choose one or more depending on your investment needs. If you are risk-averse and want to avoid equity, you can invest in debt funds that a ULIP offers and get the benefit of stable returns without volatility risks.
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