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3 Equity Investment Fundas in ULIP for Long-Term Growth

3 Equity Investment Fundas in ULIP for Long-Term Growth

3 Equity Investment Fundas in ULIP for Long-Term Growth

ULIP investment plans offer the flexibility and features you need to build wealth in the long run. Unit Linked Insurance Plans like Invest 4G from Canara HSBC OBC Life give you ample options to control the risk of your portfolio while investing in equity funds.

Here are three ways you can maximize your portfolio growth with equity funds using ULIP plan features.

Create SIP Regardless of Your Investment Mode

Systematic investment is the best mode of investing in the equity markets. Investing a fixed amount regularly in a volatile market helps you lower your average cost and risk over time. The best frequency of SIP is the monthly mode of investment.

However, just in case monthly mode is difficult for you and you prefer once in a year investment, ULIP plans have a solution for you. ULIPs like Invest 4G have the option of systematic transfer, which automatically creates SIP to your chosen equity fund.

How Does Systematic Transfer Work in ULIP?

When you invest a lump sum amount in your ULIP plan, you have a defined ratio of allocation to different funds. First, your premium is divided as per the defined ratio and the money allocated to equity funds is parked in a liquid fund.

Over the next 12 months, the amount parked in the liquid fund is transferred to equity fund with identical amounts going every month. Consider the following example:

You want to invest Rs. 2.4 lakhs a year into a ULIP, in a 50:50 ratio to debt and equity funds. Since you want to benefit from the SIP mode of investment into equity fund, you opt for a systematic transfer option in the ULIP.

The plan will park Rs. 1.2 lakhs in a liquid fund and invest the rest in a long-term debt fund. While the debt fund will continue unaffected, about Rs. 10,000 will be transferred from the liquid fund to the equity fund every month.

The transfers are made in such a way that at the end of the 12-month period your liquid fund balance becomes zero.

Thus, despite investing Rs. 1.2 lakhs once in the past year, you create a SIP of Rs. 10,000 every month.

Manage Your Portfolio Risk Automatically

SIP is an effective way of minimizing your equity investment risk. However, as your portfolio grows, so does your overall risk.

For example, you may invest your premium in equal proportions into equity and debt fund, but after a few months, your overall portfolio will have a different ratio.

  • If debt performed better than equity market – Debt fund value > Equity fund value; i.e. Portfolio risk is lower
  • If equity markets performed well – Equity fund value > Debt fund value; i.e. Leading to higher portfolio risk.

If you wanted to maintain a 50:50 ratio of debt and equity portfolio, you will need to regularly liquidate the equity portfolio and invest in debt and vice versa. However, you might find this exercise a bit tedious along with your business or employment.

Thus, you should try and automate portfolio rebalancing using the features in ULIPs. The best unit-linked plans including Invest 4G give you the option of selecting a portfolio rebalancing strategy:

  • Return protection option
  • Auto fund Rebalancing
  • Safety switch option

Rebalancing in Return Protection Option

Return protector option helps you skim off the returns from equity markets.

For example, you can set your skim threshold for equity funds at 5%. Whenever the equity fund value grows by 5% over your invested value, the scheme will book the profits and invest the money into debt funds.

In the above case where you have invested Rs. 1.2 lakhs into the equity fund and your fund value grows to Rs. 1.26 lakhs. If you have chosen the RPO strategy, the scheme will liquidate equity fund units worth Rs. 6000 and deposit the money in a debt fund.

This strategy is great at reducing your risky portfolio over time. Due to consistent skimming at higher market levels your equity portfolio value keeps declining while your debt portfolio will keep growing. However, the strategy may not completely eliminate your portfolio risk.

Auto Fund Rebalancing

We have seen the example of auto fund rebalancing with a fixed 50:50 ratio above. If you choose this rebalancing option, the ULIP will rebalance your portfolio once every three months. Once again, the rebalancing happens by liquidating and transferring the money to the undervalued fund.

This strategy does not reduce your portfolio risk over time but maintains it. So, it is better to use the next strategy along with this, so that you can avoid the market risk as you approach maturity.

Safety Switch Option

This option comes into effect only in the last four policy years. The purpose of this option is to systematically withdraw your portfolio from the equity market and put the money into a safe asset.

Last four years, because before that you have time and you need growth. But as you approach maturity you should avoid risking your accumulated corpus.

Withdraw Systematically

The last but, perhaps, one of the most ignored strategies of equity investing is the withdrawal strategy. You should follow the same discipline while withdrawing from the equity investments that you followed at the time of investment. That is, withdraw systematically.

Systematic withdrawal ensures that you don’t miss on the recent market opportunities completely, while still lowering your investment risk. We have already discussed one strategy to systematically switch your funds to a safer investment option within the ULIP plan. But you can also withdraw from the ULIP using systematic withdrawal.

You can also use this option to build your post-retirement income after the age of 60. However, make sure your entire corpus has been moved to a fixed income fund in the ULIP before that.

Additionally, ULIPs are great for generating tax-free income, and if you can continue long enough, for tax-free estate transfer.

Speak to an insurance specialist now!

FAQs

In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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