ULIPs or United Linked Insurance Plans are a transparent insurance-cum-investment product that offers the dual benefit of life cover and wealth creation. ULIP investments are highly flexible and come with a lock-in period of a minimum of five years. In a ULIP policy, a part of your premiums is used to provide a life insurance cover while the remaining portion of the premiums is invested in the market.
Among other features of ULIP, you get the liberty to choose your funds and also switch between funds over time to maximise gains and minimise losses. This helps you tailor your ULIP investments as per your risk preference and financial objectives. The switch funds option in ULIPs makes them an attractive investment because it gives you the freedom to manage your investments in the manner that is best for you.
Here is everything you should know about the switch fund option in ULIPs:
What is fund switching in a ULIP? How does it work?
In the investment component of your ULIP, you are typically investing in different types of equity, debt, and balanced fund options. Each ULIP is invested in four to five funds. The best ULIP fund investment depends on your risk tolerance and financial goals.
For instance, if you are a risk-taker, you might prefer investing heavily (assuming 70%) in equities and lesser in bonds (30%). However, as you near your retirement age, you might prefer a more conservative fund comprising mostly of bonds. In such a case, you can tap the fund switch option and move your equity investments to buy more bonds. You can also choose to completely be invested in equity or bonds, as per your preference.
Fund switches are an option given by the insurance company where you are allowed to move your ULIP investment from one fund to another within the same plan. You can choose to transfer your units partially or fully between different fund options – equity, debt and equity to debt. This helps you move out of loss-making funds or focus more on profit-making funds. Many companies limit the fund switches in a ULIP policy. However, the best ULIP plans allow unlimited free switches.
When to make the fund switch?
To ensure the ULIP policy fund switch works in your favour, you must track your ULIP fund performance over time through the Net Asset Value (NAV) declared by the insurer periodically. Further, at the time of investing, the insurer will give you all details about the ULIP charges, fees and any other expenses involved in the fund switch.
Since you cannot precisely predict the market, it is difficult to ascertain the right time to make a fund switch. However, the objective of fund switches is to optimise your investments. You can make a fund switch and transfer a significant portion of your investment to debt funds and then redirect it to equity when the market gains. If your ULIP plan is near maturity or if you have to fulfil a financial need, such as your child’s education, buy a house, etc., you can invest a sizeable part of your ULIP policy in bond funds two-three years in advance.
For example, you invest 100% of your ULIP premiums in equity funds. After five years, your financial responsibilities increase, and you now have to pay for your marriage and later for your child’s education. You analysed that your risk tolerance has lowered, and you should also focus on debt funds. You can choose the switch fund option and transfer (assuming 20%) of funds in bonds. You can similarly change your asset allocation as you advance in life and your responsibilities increase.
What are the benefits of switching funds in a ULIP plan?
- ULIP fund switching enables you to tailor your ULIP investment as per your risk appetite. Your risk preferences change with each life stage. Hence, with the fund switch option, you can adapt your ULIP investments to suit your risk preference over the years.
- As an investor, it is not possible to anticipate market movements. However, there are times when making necessary adjustments in your ULIP policy can help you minimise loss or maximise ULIP returns.
- ULIP switches allow you to align your portfolio with your life goals. For instance, you could be heavily invested in equity funds before retirement. However, as you approach near retirement, you might want to shift your investments to bonds with the aim of capital preservation.
- ULIP fund switches do not attract any capital gain tax. You do not have to pay any taxes on fund switches in your ULIP. This helps you plan your asset allocation more tax-efficiently.
What are the ULIP charges for switching funds?
Many insurance companies allow you 5-10 free switches and levy a charge of ₹50 to ₹500, post that. However, the Edelweiss Tokio ULIP Plans offer free fund switches without any upper limit.
To ensure that fund switches work in your favour, be sure to constantly monitor your ULIP plan NAV with the fluctuations in the market. By making use of the fund switch option, you can easily improvise ULIP returns.
To make the fund switch, you can fill the required form and submit it to the nearest insurer branch with the precise details of the amount to be transferred from your old fund to the new fund you choose. Alternatively, you can manage your fund switch through the self-service facility offered by various insurance companies on their websites.
Edelweiss Tokio ULIP Plans
Edelweiss Tokio Life Insurance offers different ULIP plans to suit your life goals. These plans come with free fund switches, affordable premiums, competitive features, attractive returns and offer a wide choice of funds to suit your investment needs.
Overall, ULIP insurance is one of the most cost-effective investment options that give you market-linked returns and insurance cover. The option of fund switching adds more flexibility to ULIPs, making them a great option for all types of investors.
Neha Panchal - Financial Content Writer
Neha used to be an Engineer by Profession and Writer by passion, which is until she started pursuing full-time writing. She's presently working as a Financial Content Writer, with a keen interest in all things related to the Insurance Sector.