Investing in a ULIP could earn you handsome returns in the long run, although it does come with market-linked risks. If you have invested in a ULIP or are looking to do so in the near future, you should have a good understanding of the investment component of these plans to maximize returns.
Here is some vital information you should remember while considering these plans.
What is a ULIP?
ULIP is an acronym for a Unit Linked Insurance Plan, a modern hybrid of insurance and investment propositions for customers. You pay premiums that are invested in market-linked financial instruments (after deducting all applicable charges). Additionally, you also get a life cover for a sum assured, lending financial safety to your amily/loved ones in case you are no longer around. This helps investors get market-linked returns and enjoy life insurance coverage throughout the policy tenure.
Using a ULIP calculator to work out your returns
Since the returns you get from a ULIP are linked to market performance, it is impossible to predict how much you stand to gain accurately. Yet, you can always use a ULIP calculator for calculating your approximate future returns. You have to input a few things for this purpose, including the following:
- The amount you wish to invest in the ULIP
- The ULIP tenure
- The premium payment frequency
- Type of funds that you want to invest in
This will give you an idea of the average returns from your ULIP that can be expected in the long haul. Remember that these are approximate returns, as market conditions may vary throughout the policy tenure.
How much can you realistically earn with your ULIPs?
Adopting a realistic and practical approach to your ULIP investments is essential. These policies first came to India in 1971 and have since attained immense popularity amongst investors. They have also evolved considerably to ensure added benefits and convenience for customers.
The returns may vary depending on various market scenarios and other conditions. As per prevalent industry trends, you can anticipate anywhere around 10-12% in returns or even slightly more, depending on the amount you invest, the tenure, and the performance of your chosen funds in the market.
Investing your money for a longer term is important to even out market volatility to an extent. You should also periodically switch your funds based on prevailing market conditions. These strategies will help you earn better returns over a prolonged duration.
Fund options that you can invest in
While buying your ULIP, you can choose from various types of funds to invest in. These directly impact your overall returns. They include the following:
- Equity Funds – These funds are where your money will be deployed in buying shares of various companies. They are riskier investments, being linked to volatile market movements and fluctuations. However, they have a higher potential for future growth and returns. This is suitable for those with higher risk tolerance.
- Debt Funds – These funds invest in various debt instruments, including Government and corporate bonds, securities, debentures, and fixed-income bonds. They have lower risk levels than equity funds, although the returns are also lower. This is suitable for those with lower risk tolerance.
- Liquid Funds – These are suitable for catering to short-term objectives, and money is deployed in market instruments with higher liquidity. These include certificates of deposits and treasury bills with smaller maturity periods which are not similar to regular ULIPs.
- Balanced Funds – These are funds that deploy investments in a mixture of debt and equity. The risk thus gets distributed throughout both types of funds. The returns are more consistent, while volatility levels are lower.
Fund switching in ULIPs
You can always switch across the various fund types if you are unhappy with the returns generated by your ULIPs. Likewise, you may shift your units entirely or partly to other funds. Here are some strategies that you can note:
- Fund Switching based on your life stage – This uses the principle that risk levels vary per the investor’s stage of life. Hence, risk tolerance is higher when one is younger and comes down with age and increasing financial responsibilities. Therefore, you can start at a younger age with more equity-based funds while shifting to debt-based funds, which have lower risks in the future.
- Profit-earning switching strategies – This is where you switch between funds based on market trends. However, you should be alert and do your homework in this regard. You can switch to funds that have lower risks if you can clearly witness a market slump. In this case, you can switch to debt funds for a while and then return to equity funds when the market revives.
Some tips for investors
Finally, here are some tips that you should keep in mind above all else:
- Be careful while fund switching. You can start by investing more in debt funds since they have lower risks.
- Be patient and switch to equity funds once the market keeps performing steadily.
- Ensure that you do not switch back to debt funds too late in case of a market slump. Do not wait till the market hits its lowest possible benchmark.
- Always wait to ride out market fluctuations, and do not keep switching your funds continually with every temporary low/high point in the market.
- Avoid making any partial withdrawals from the corpus.
- The longer your investment tenure, the more you gain in accumulating a steady corpus and spreading out risks.
- You can also leave your fund to be managed by the insurance provider, leveraging the skills of expert fund managers to maximize returns.