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When is the Right Time to Switch your ULIP Fund?

When is the Right Time to Switch your ULIP Fund?

Know the right time to switch your ULIP fund!


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Sep 15, 2021

By : Bajaj Allianz Life

When you purchase a ULIP policy, you can meet two objectives i.e. of insurance and investment. The life cover offered by the ULIP takes care of insurance, while the ULIP returns, which are market-linked, come from the investment component. Aside from these two key benefits, ULIPs have many other useful features that can help policyholders make the most of their Unit Linked Insurance Plan.

And one such feature is the fund switching facility. Many beginner investors may not be aware that there is such a feature, let alone know what it is useful for. So, today, we’re going to dig a little deeper and understand what the fund switch in ULIP is all about.

We’ll then see how it works and check out when is the appropriate time to switch your ULIP funds. So, let’s get started.

 

What is fund switching in ULIPs?

 

When you invest in a Unit Linked Insurance Plan, you get to choose between a variety of funds to invest in. These funds include equity funds, debt funds or both. The risk level varies from very high risk to very low risk, so you can create your investment portfolio according to the level of risk that you can tolerate at that point in life.

For instance, say you are very young - in your early 20s - when you first purchase your ULIP insurance plan. At that point, you are open to taking a higher level of investment risk. So, you decide to invest in the equity market. However, 10 years down the line, you’re married and have two children, and at this point, your risk appetite goes down a bit. So, you cannot afford to have such high equity exposure in your portfolio, isn’t it?

Here is where the fund switching option in ULIPs comes in. You can make use of this feature to move your investments in the ULIP policy from equity funds to debt funds, or vice versa. Want to know more about how this works? Let’s discuss those details, then.

 

How does it work?

 

To understand how fund switching in ULIPs work, let’s take up an example. Say you are 25 years old, and you buy a ULIP insurance plan, which has 30 years to maturity. At the time of purchase, you decide to put 100% of your investment in equity funds. So, your allocation to debt funds is 0%.

And 5 years later, at 30 years of age, say you want to reduce your equity exposure a little bit. So, you move 10% of your investments from equity funds and move that bit to debt funds. And then, another 5 years later, you do the same with a further 10% of your investments.

Thereafter, every 5 years, you continue to move 10% of your investments from equity to debt funds. So, in the 30 years you hold the policy, this is how the switches will look like:

Years to maturity

Allocation to equity funds

Allocation to debt funds

30

100%

0%

29

100%

0%

28

100%

0%

27

100%

0%

26

100%

0%

25

90%

10%

24

90%

10%

23

90%

10%

22

90%

10%

21

90%

10%

20

80%

20%

19

80%

20%

18

80%

20%

17

80%

20%

16

80%

20%

15

70%

30%

14

70%

30%

13

70%

30%

12

70%

30%

11

70%

30%

10

60%

40%

9

60%

40%

8

60%

40%

7

60%

40%

6

60%

40%

5

50%

50%

4

50%

50%

3

50%

50%

2

50%

50%

1

50%

50%

So, see how your asset allocation gradually changed over the years? This is how fund switching works. You sell off your assets from the funds that you want to reduce, and use the returns to purchase assets in the different category funds you want to invest in. Simple, isn’t it?

 

Best time to switch funds

 

Now that you know how fund switching works, you are perhaps wondering what the best time to switch funds is. The short answer is that there is no single best time to switch funds. That said, there are some trigger points that may indicate that fund switching may be necessary. Here are some such triggers.

 

• If your risk appetite changes:

 

If your risk appetite increases or reduces, it may be time to switch funds, so you can ensure that your portfolio is not exposed to more risk than what you can handle.

 

• If the market moves significantly:

 

Market fluctuations may also be a reason to switch funds. For instance, if you anticipate a bear market, you may want to switch your funds from equity to debt, so your ULIP returns are not impacted adversely.

 

• If your life goals change:

 

Changes in life goals also mean that your asset allocation requirements could change accordingly. And so, that may be another suitable time to switch ULIP funds.

 

Cost of switching funds in ULIP

 

The good news is that most new-age ULIPs allow investors to make multiple fund switches without any added costs. However, do note that some ULIPs may come with a limited number of free fund switches. After you cross that threshold, a nominal fee will be levied. Before you buy a ULIP, look into this so you know how many free fund switches you have in a policy year.

 

Conclusion

 

The above guide should give you a fair idea of how switches work in ULIPs, and when you may need to make them as per your needs. Keep this feature in mind if you feel the need to modify your asset allocation in ULIP funds. You can always take an advise of an expert who can help you plan your ULIP investment if need be.

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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.