Unit-Linked Insurance Plans or ULIPs is a combination of life insurance cover and a market-linked investment plan. After deducting all charges and premium for risk cover, the insurer allocates a part of premium in different fund units. Going by returns, ULIPs score over traditional investment products, such as PPF, and NSC, which usually give interest between 8% and 9%. Also, the added advantage is the insurance cover that ULIPs offer.
So whether you are in the process of choosing a ULIP, or have already invested in the product, here are some ways through which you can maximise your ULIPs returns.
- Performance Tracking
ULIP has a transparent structure. It means all commissions and charges are mentioned in the policy document. Besides, insurers send daily updates on Net Asset Value (NAV) along with quarterly and yearly reports on the performance of ULIPs. It means you can keep a close watch on your product and track its performance.
Even in the policy document, all ULIP fund options are detailed. Usually, insurers offer the following types of fund options.
|Type of Fund||Nature of Investment||Risk Element|
|Equity Funds (also called growth fund)||The investment is made in company’s stock with the aim of capital growth||Medium to High|
|Bond Funds (also called income and fixed interest)||The amount is invested in government securities, corporate bonds and various other fixed income investment options||Medium Risk|
|Secure Fund (also called cash fund, money market fund)||The amount is invested in bank and money market instruments||Low Risk|
|Balanced Fund||It offers a mix of investment in equity and debt||Medium Risk|
- Fund Switching
You can seamlessly switch between different fund options to protect your investment from market volatility and maximise returns by maintaining a balance between equity and debt. For instance, if you foresee a dip in the market, you can switch funds from equity to debt. When the market corrects, you can switch back to equity to leverage the upswing.
Similarly, you can exercise fund switching option when you are approaching a milestone in your life. For instance, if you have invested in ULIP for a child’s education or marriage, you should move a maximum amount of your fund to the safer option, such as debt, at the appropriate time. In this way, you can ensure that you get the maximum amount whenever a need arises. Also, if your policy approaches towards maturity, you should switch funds from a high-risk fund to low-risk option to ensure that a large amount of corpus is available at maturity. The amount to be switched will depend on your risk appetite, and most importantly, your risk horizon.
When to switch: This is a decision that will impact your market returns. Let’s understand it with an example. Mr Raj Kishan, a 25-year old, has bought a ULIP with tenure of 25 years. As Raj is unmarried and has no financial obligation, he can invest a significant chunk of his money in equity. After a few years, say five years, when his financial responsibilities will increase after marriage and kids, he can cut his investments in equity and move high amount to debt.By continuously reviewing his investment portfolio, it is recommended that in the last five years of policy, he should maintain only 20-25% investment in equities and the rest amount should go into debt.
To ease the switching process, insurers also offer automatic switching option. It means if you are not market-savvy or have limited financial knowledge, you can opt for the wheel of life portfolio strategy or asset allocation fund. In this, the insurer’s fund manager switches funds between equity and debt as per the market condition on your behalf. Depending on the ULIP product, insurers usually allow 10-12 free switches in a year. Some insurance companies have entirely waived off charges on free switches. For instance, if you opt for ICICI Pru Elite Wealth II, you can get unlimited free switches under the fixed portfolio strategy.
- Premium Redirection
To shield your investment from market fluctuations, you can redirect your future investments from a risky fund option to a less-risky fund. Once the market improves, you can redirect your premium to more balanced funds and enjoy high returns on your investment.With the premium redirection, you can continue to keep your previous investments in equity to generate returns in a long-term.
Insurers, such as ICICI Prudential, offer you an option to choose a personalised portfolio strategy at the inception of the policy. For instance, ICICI Pru Elite Wealth II offers a lifecycle-based portfolio strategy to maintain a balance between equity and debt fund options as per the insurer’sage.
Here’s the asset allocation offered under ICICI Pru Elite Wealth II to help you understand how the entire process takes place:
|Age of the policyholder (in years)||Multi-Cap Growth Fund (High Risk)||Income Fund (Low Risk)|
|Up to 25||85%||15%|
|26 – 35||75%||25%|
|36 – 45||65%||35%|
|46 – 55||55%||45%|
|56 – 65||45%||55%|
|66 – 80||35%||65%|
Source: ICICI Pru Elite Wealth II Product Brochure
In a nutshell, ULIPs demands both discipline and perseverance. In case of fall in market returns, a market-savvy investor can exercise any of the above options and sail through it. However, if you don’t have time or market understanding, rely on the skills of your insurer’s fund manager.