A Unit Linked Insurance Plan (ULIP) serves the dual purpose of providing a life insurance cover and investment returns. In a unit linked plan, the insurance company sets aside a portion of the insurance for life cover and invests the rest across different assets like stocks and bonds. Flexibility to switch funds, inbuilt benefits,tax savings, insurance cover and lower management charges than mutual funds have contributed to the growing popularity of unit linked insurance plans.
ULIPs are best suited for realizing long-term plans of wealth creation and insurance. Like mutual funds, ULIPs are market-linked plans and may need to be adjusted in a dynamic market to maximize returns. As these plans have a five year lock-in period, it is best to stay invested for a few years to derive considerable returns. At the same time, regular monitoring of funds is important to ensure maximum returns in the long term.
As insurance and investment are covered in a ULIP, investors may not fully comprehend or utilize the investment related choices in a ULIP investment. This may prove costly as the investment risk is borne entirely by the policyholder. Here are some strategies investors can adopt to minimize risks and safeguard their funds.
Investors must consider the premium and the term for which the premium is paid to calculate returns from a ULIP investment. To calculate absolute return, also known as point-to-point return, investors need to compare the initial NAV with the current NAV of the scheme. Here are the steps to arrive at the absolute return.
The absolute return indicates the performance of a ULIP in the short term. As investments are built on compounded returns, the absolute return may not give a true picture of actual returns in the long term. Compounded annual growth rate (CAGR) indicates the annual growth of an investment over a period of time.
A policyholder can use the beginning value and end value of the scheme and the number of years to calculate the CAGR for a ULIP. However, CAGR does not consider volatility in returns over a time period. Thus, in the absence of market volatility and other factors, CAGR cannot be used to assume that the ULIP investment would follow a similar growth pattern in the coming years.
ULIP investment can help realize long-term financial goals such as buying a property. Regular monitoring of funds is vital to make adjustments and derive maximum return in the long term. Investors must also look out for opportunities in the market to switch funds and monitor the plan effectively.
Considering the immense benefits of a ULIP investment, you can choose the Invest 4G Plan from Canara HSBC Oriental Bank of Commerce Life Insurance. This plan offers multiple choices of investment along with a life insurance cover. You can choose between 7 different funds and switch funds to benefit from market movements.