ULIPs have steadily gained popularity among Indian investors, especially in the last decade. Their unique proposition of combining life insurance cover with elements of investing in market-linked instruments has made it an essential product in any portfolio. If you are someone who has invested in ULIPs or is looking to invest, then the question of returns will have indeed crossed your mind.
Do you wish to earn better and safer returns from your ULIP investment? The truth is that all market-linked investments carry an element of risk, and the rates of return never guarantee, yet, modern ULIPs grant enough control and provide enough features to help investors maximize their returns.
To ensure this, one of the most important aspects of a ULIP plan that you must know about is fund switching. To begin, let’s take a step back and get a clearer understanding of the various types of ULIP funds first.
What Are The Various Types Of ULIP Funds?
Before you check an online ULIP calculator to get an estimate on your future returns, reflect on the fund types available to you. These usually vary from one insurance provider to another. Your selection will automatically influence the returns on your investment, so take your time and consult an expert if required. Here are the primary fund types that you should know about:
- Equity Funds – These carry the highest risks, and most of your money will invest in the equities of various companies. They can segment into large-cap, small-cap, and mid-cap funds, depending on the market values of their stocks. In these funds, equity exposure may go up to 70% or slightly lower, based on the terms and conditions of the insurance company. They are riskier but highly rewarding investment options, suitable for the long haul.
- Fixed-Income/Bond Funds – They are sometimes also known as debt funds. These funds deploy investments in instruments with fixed incomes. The risk levels are lower, although the returns are comparatively lower than equity funds. The investments will be spread across bonds, Government securities, etc. They are more suited for those with lower-risk appetites.
- Liquid/Cash Funds- They invest primarily in liquid market instruments, including bank deposits, specific types of securities, and cash deposits. They are usually better for investors with a lower risk appetite. While their returns are also lower compared to other ULIP fund
- Hybrid/Balanced Funds: Hybrid funds are mutual funds that invest in two or more asset classes, such as debt and equities. The two fundamental tenets of these funds are asset allocation and diversification. Hybrid funds come in various forms, depending on the ratio of investment in each asset class and the fund’s objectives. To achieve diversification, the portfolio of these funds includes a specific combination of financial instruments, which decreases the investment risk while maintaining healthy returns.
What is Fund Switching, and How You Can Manage It
Once you understand the multiple ULIP funds, you should delve deeper into what is known as fund switching. Here are some core points that you can remember:
- When you start your ULIP investment, you can select your preferred fund types for investments. You should do this based on your future financial objectives and tolerance for risk.
- Fund switching is a feature that enables you to keep rebalancing or re-aligning your portfolio as per your evolving financial goals and capacity for risks. For example, you can switch to a different fund from your current choice, reallocating the proportion of your money invested in such market assets.
- Most ULIP policies have a certain number of switches that can be done for no extra charge every year. You can hence optimize your portfolio throughout the policy duration.
- Fund switching impacts your returns positively in many cases. For example, suppose the equity markets witness a bull run, and your fund outperforms its competitors. Then, you can switch most of your allocation to equity and cash in on the same. After that, once you sense a bearish phase in the equity market. You can switch more towards debt funds or balanced funds to keep your returns stable while simultaneously lowering your risks as well.
- This helps you evolve your investment strategies based on your changing financial objectives and capacity to take risks. Those with a higher risk appetite may wish to aggressively build their future corpus by deploying more toward equity funds. Those who want to ensure the future stability of their investment may consider aligning more toward debt funds. Some start with higher equity allocations in their early years, gradually reduce their risk exposure and switch to debt funds with increasing age and financial responsibilities.
- Fund switching also helps you safeguard your investment from volatility and sudden shifts in the market, although your timing is of the essence.
You may switch funds through your insurer’s self-service digital portal or mobile app. You may also furnish a signed application form to your insurance company’s branch with all the relevant details. While some ULIPs may come with a certain number of free switches, others may charge you an added amount for anything beyond this. Some also offer unlimited free switching for investors. So check out this feature with care before you invest.
Fund switching is one of the best ways to maximize and scale up your returns while lowering your risks simultaneously. Of course, it requires more involvement on your part, or you can also hand over the responsibilities to fund managers as part of your portfolio management strategy. However, there is no denying that in a rapidly-evolving age and with continually changing market trends. It is not prudent to remain static regarding one’s investments.