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Know How ULIP Fund Switching Works

ULIP Funds - Understand The Fund Switching Option

Know How ULIP Fund Switching Works


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Mar 25, 2019

By : Bajaj Allianz Life

Unit Linked Insurance Plans (ULIPs) come with the dynamic option of Fund Switching, which provides the much-needed flexibility to this investment product. Policyholders should leverage the fund switching feature to optimize their returns effectively, without any tax implications. This not only reduces their tax incidence but also increases their post-tax returns.

What Is Switching?

While investing in a ULIP Plan, the investor gets a choice to invest into debt or equity funds or a portfolio with a combination of both. The added advantage of ULIPs is the powerful tool of 'fund switching', which gives an investor the flexibility of free switches between funds. What this means is that policyholders can move their investments from one ULIP fund to another, within one plan. They can transfer units fully or partially between ULIP funds-equity, debt or a combination of both.

One of the key determinants of risk and return in a portfolio is asset allocation. And the fund switching feature helps an investor to optimize their asset allocation and returns (depending on market conditions), without any capital gains tax incidence

To Switch Or To Not To Switch?

It is not possible for investors to time the markets or anticipate the ups or downs. But with the switching option, investors can protect their investments from market fluctuations to some extent by diversifying their investments between equity and debt funds.

In addition to market fluctuations, the decision to switch between ULIP funds should also be based upon the risk appetite of investors and their life goals.

Now, let's say a ULIP investor starts investing towards his life goal at a young age of 25 years, in this scenario he/she can afford to take more risk. As the investor's age increases, or as the investor approaches the maturity of the life goal, it is advisable to reduce risk by moving slowly from equity to debt, which bears lower risk profile. This type of switching is market independent and can be done by any investor based on their life goals and risk appetite.

To comprehend this better, let us understand the Wheel of Life portfolio strategy (refer to the below table), which uses 'Years to maturity' based portfolio management approach. You can either opt for this strategy at the initiation of the policy or can switch to this option at any subsequent policy anniversary. In this strategy, your investments would be allocated across Equity Fund, Bond Fund and Liquid Fund as per the outstanding years to maturity of the plan. So, when you are at the beginning of the plan and you have, let's say 20 years to maturity, 100% of your funds are allocated in equity but this changes after 10 years, when 70% of funds are invested in equity and the rest in Bond Fund. The investment in equity goes on decreasing as you move closer to the maturity of the policy. This strategy helps in managing risk and optimizing the returns on your investment.

Years to Maturity

Equity Funds (%)

Bond Fund (%)

Liquid Fund (%)

20

100

0

0

19

100

0

0

18

100

0

0

17

100

0

0

16

100

0

0

15

95

5

0

14

90

10

0

13

85

15

0

12

80

20

0

11

75

25

0

10

70

30

0

9

65

35

0

8

60

40

0

7

55

45

0

6

50

50

0

5

40

55

5

4

30

60

10

3

20

65

15

2

10

70

20

1

0

80

20

Hence, it is best to switch in a phased manner and in line with your financial goals. Most of the ULIPs in market today, offer unlimited free switches while some charge after the initial five-six switches.

The above are some of the major points that should be kept in mind before deciding whether to switch between ULIP funds or not. ULIPs are one of the cost-effective investments to gain from the market-linked funds over the long-term and the option of switching further adds flexibility to the investment.

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~Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility.

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.