Unit Linked Insurance Plan (better known as ULIP) is the life insurance plan which in addition to providing risk cover to the insurance seekers, also gives investment options. It is a market linked product which gives flexibility in investing in qualified capital market investments like equity or debt funds as per the policyholder’s convenience.
When you put resources into ULIPs, to make a flexible portfolio, it is best to spread your risk and your investment over various asset classes. The essential determinant of risk and return in a portfolio is resource allocation. This guarantees your return gets offset – adjusting for any misfortune made on any asset class with profits made by another, reducing the overall risk of your investments. But more importantly, ULIPs give you the adaptability of switches between assets to help you viably deal the portfolio asset allocation.
- Balance your debts and equities
Selecting between the debt and equity ratio depends on your life stage needs. As a thumb rule, if 100 is the total investment you must deduct your age from this and invest the remainder into equity. For example, if you are 30 years of age then you should invest (100-30) 70% in equities and 30% in debt.
- Understand your life stage needs
Be instinctive and switch from more risky equity funds to less risky debt funds as you get older.
- Take advantage of semi-controlled switching options
If you feel that you don’t have the time or the know-how to actively manage and monitor your portfolio you can try using the programmed switching option available with ULIPs. For example, you may decide to switch a fixed amount from one fund to another fund on a fixed date.
- Understand the overall economic scenario
If equity markets look significantly overvalued and expensive, you may switch from equity funds and only switch back when equity markets correct substantially.
- Other charges
Many investors find the charges associated with ULIPs as a downside. Just like other investment options, ULIPs too have certain charges associated like policy charges, mortality charges, premium allocation charges, fund management charges.
However, the new age ULIP has zero allocation and policy charge. This acts as a saving factor. It also provides additional allocations to your investments which increase in time. This is where the company also invests with you thus providing you with higher returns.
The bottom line is since these are long-term market-linked plans, you should review and manage them appropriately to optimize your asset allocation, minimize risk and maximize returns by choosing the right plan.