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    ULIP Funds – Know Everything About Them

    ULIP funds

    ULIP Funds – Know Everything About Them


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    June 15, 2020

    By : Bajaj Allianz Life

    ULIPs are one amongst the most preferred investment options in the Indian financial markets right now. They offer alternative investment solutions for investors with varying risk profiles with a life insurance cover component as well. So, irrespective of whether you’re a conservative investor or a risk-taker, you’ll find ULIP funds that fit right into your risk-reward graph. Getting to know more about the kind of funds available in a ULIP plan helps you structure your investment smartly. Furthermore, allocating your money across different funds in a prudent manner also helps maximize your ULIP returns.

    So, here’s a closer look at the different types of ULIP funds generally available to investors in the Indian markets.

     

    1. Equity funds (High Risk)

     

    In these funds, a major percentage of your premium is invested in the equities of listed companies. Fund managers perform adequate research and identify the best stocks to invest in. Depending on the market value of the stocks these ULIP funds invest in, they’re classified as small-cap, mid-cap, or large-cap funds. The exposure to equity in these funds, also referred to as growth funds, can range from 20% or lower to 70% or more, depending on the insurer’s terms and conditions. The primary aim of equity funds is to bring about capital appreciation.

    Risk factor: Equity funds are typically high-risk investment options.

    ULIP returns: The rewards offered by these funds are also on the higher side.

     

    2. Fixed income funds & bond funds (Medium Risk)

     

    These ULIP funds invest in financial instruments that offer a fixed income. When you choose these funds, your premium is primarily invested in debt instruments like government securities, corporate bonds, and fixed income bonds. Since these types of ULIP funds offer stable returns, they’re considered preferred option for conservative investors with a low appetite for risk. If you’re looking to add an element of stability to your investment portfolio, you can consider investing in fixed income funds. Also known as bond funds, these ULIP funds could provide as preferred option for long term investment.

    Risk factor: Fixed income funds or bond funds are generally considered to be medium-risk investments.

    ULIP returns: The rewards obtained from these ULIP funds can range from low to medium levels.

     

    3. Cash / Liquid funds (Low Risk)

     

    Also often referred to as liquid funds, these ULIP funds invest a major portion of your premium in liquid investment options. Some such liquid investment alternatives include cash and bank deposits, cash equivalent securities, money market instruments, or short-term debt-based securities with a high credit rating.

    Risk factor: These funds come with low risk, making them preferred option for conservative investors.

    ULIP returns: The returns offered by cash funds are also quite low when compared with other types of ULIP funds.

     

    What is the ULIP fund switching feature?

     

    Now that you know the different types of ULIP funds offered by most ULIP schemes in the country’s financial markets, it’s time to look at an interesting feature known as fund switching. This is an extremely useful option that forms part of ULIP investment schemes available for Indian investors.

     

    Fund switching in ULIPs

     

    ULIPs come with multiple fund options under the same plan. When you first purchase a ULIP scheme, you have the choice to pick the funds you wish to invest in. Depending on your financial goals, your risk profile, and your investment budget, you can pick from among the choices of funds on offer.

    However, what if your goals or your risk appetite change over the years? How do you ensure that your investment choices are aligned with your requirements? Here’s where the fund switching feature in ULIPs comes in handy. With this feature, you have the option to switch from one fund to another, thereby rearranging the way your capital is allocated between the assets. The investor gets a choice to invest in debt or equity funds or a portfolio which has a combination of both. Many ULIP schemes offer you a specified number of free switches each policy year, so you can take advantage of this feature to ensure that your asset portfolio is always optimally constituted. You also often have the option of transferring your money either partially or completely between different funds.

     

    How does it affect your returns?

     

    Fund switching might have a positive impact on your ULIP returns. This is because asset allocation plays a key role in determining the balance between risk and return in your investment portfolio. By paying attention to the types of ULIP funds you invest in, you can work towards you maximizing your returns and also balancing and diversifying risk.

    The fund switching feature helps you optimize the allocation of your assets by letting you redirect your capital to funds that show greater promise, as per market conditions/outlook. For instance, if the market conditions improve six months after you’ve invested in a specific combination of funds, you can make use of this fund switching option to change your portfolio of assets and invest in fund options that benefit from the upswing in the market.

    Alternatively, if the market appears to be performing poorly, the fund switching feature allows you to switch from equity funds that may be affected by the market-downturn to safer investment fund options. This way, you can ensure that your returns are optimal, or at best, down-side risk is protected, since you can choose the types of ULIP funds to invest in.

     

    What are the benefits of having multiple fund options in one plan?

     

    Having multiple fund options under the same ULIP policy is beneficial to the investor in more ways than one. Here’s a quick look at these advantages.

    • You can choose ULIP funds that match your risk profile

    With many options to choose from, each with varying risk exposures, you have the luxury to pick the ULIP funds with the right levels of risk. This way, you can play within risk levels that are convenient for you, while simultaneously enjoying the advantage of investment and insurance.

    • You can align your investment portfolio with your life goals

    Having multiple fund options in one plan also proves useful if you wish to align your investments to your life goals. You can also use the fund switch option to ensure that your assets are in line with your short-term and long-term objectives. Without multiple funds to choose from, this advantage would not be available.

    • You can take advantage of market movements

    Since ULIPs offer many types of funds to the investor, you’re free to choose a selection of ULIP funds that stand to benefit from market movements. For instance, if the equity markets appear bullish, you can switch to equity funds to leverage the trend. Alternatively, if debt markets look more lucrative, you can invest in debt funds instead.

     

    How ULIPs help you avail Tax Benefits

     

    ULIPs also have various tax advantages (due to their long-term nature), and regulations have also made cost (expense ratio) of new-age ULIPs quite competitive. Under Section 10(10)D of the Income tax act, the maturity proceeds or sum assured of an insurance policy is tax free, provided the sum assured is 10X (or more) of the annual premium. Also you can get exemption up to Rs. 1.5 lakhs under section 80C of the Income Tax Act, 1956. Another unique advantage of a new-age ULIP is that within the product, the investor can switch between various funds option (equity, debt, liquid fund etc.) without any capital gains tax incidence, and can switch as many times - without any additional ULIP charges or any exit load. This helps an investor to plan their asset allocation in a more efficient and tax-friendly manner, depending on market conditions and outlook.

    Therefore, the above mentioned tax advantages, along with lower expenses of new-age ULIPs, helps in higher 'net return' (net of expenses & taxes) in the hands of the investor.

     

    Conclusion

     

    With this knowledge about the different types of ULIP funds, you’re in a better position to make informed decisions about your investments. Keep in mind that you need to be aware of your risk profile, your financial goals, and the market situation before choosing your ULIP funds. You can also seek professional assistance to make smarter investment choices.

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