Are Unit Linked Insurance Plans (ULIPs) Risky?

Unit Linked Insurance Plans are some of the most flexible investment options available as long-term investments. However, Unit Linked Insurance Plans are known for their equity fund investments and market-linked returns. Are they really a risky investment?

An asset class is a culmination of similar types of assets, securities, and other instruments which behave in a certain way. Thus, all the securities that are in the same asset class are most likely to react to the market in the same way.

There are different types of asset classes available in which you can invest in. Following are some of the types of asset classes.

a) Cash and other equivalents
b) Equity
c) Bonds
d) Derivatives
e) Real Estate

Different asset classes have different factors relating to volatility, taxes, duration, etc. ULIP Plans offer three options for investment in three of these asset classes – equity, debt and cash or liquid funds.

Why is Investment Risk Necessary?

If you are thinking of making an investment, you are most likely two consider two things.

1. The risk involved in the investment

2. Returns expected from the investment

These two things are the basis of the performance of all types of investments. If these are favourable to you then the investment will also be favourable.

The general consensus is that there is a positive relationship between risk and the return of any investment. The higher the potential returns of your investment, the higher is the risk as well. This is also known as the risk-return trade-off.

That is why safer investments having little risk such as Government Bonds give you average to low returns, while highly speculative investments can give you very attractive returns.

Asset Classes & Fund Types in ULIPs

Unit Linked Insurance Plans apart from providing you with life cover, also give you the opportunity to invest. ULIPs offer three asset classes for investments – equity, debt and liquid assets in a diversified portfolio format.

So, you can come across the following four types of funds to invest in a ULIP Plan:

1. Diversified Equity Fund

This type of asset class invests in equity instruments such as stocks. Stocks are the shares issued by the companies. The prices of shares change with the change in the market conditions and thus are very risky.

These are further divided into Large Cap, Small Cap, Multi-Cap, as per the insurance provider.

2. Long-Term Debt Fund

These are safer and less volatile funds but come with a lower return than equity. These usually include government as well as corporate bonds. These tend to give you fixed returns.

3. Balanced or Hybrid Fund

As the name suggests, these funds include a mixture of both equity and debt funds. The percentage of allocation in both equity and debt is pre-decided. Generally, equity constitutes a higher part of Balanced funds. For example 60% in equity and 40% in debt.

It is a good choice in the long run as it keeps your funds ticking and is relatively safe as well. These are also known as hybrid funds.

4. Liquid or Cash Funds

Liquid funds are those which can be easily available to you in need. In most of the funds, there is a specific time period for which you have to stay invested. Liquid funds are more flexible and allow you to draw within a shorter time period.

In liquid funds, your amount is invested in Money Market instruments and have carry low risk.

You can allocate your premiums to the ULIP Plan in any ratio in these funds. You can even allocate 100% of the premium to only one fund. And, as per your fund choice, your investment risk in ULIPs can range from high (100% equity) to very low (100% liquid fund).

So, as per your fund choice, your ULIP investment can become a low-risk investment:

Who Bears the Investment Risk in ULIP PLan?

Investment risk and return only belong to the investor in any formal investment. When you invest in a ULIP Plans as well, the risk from market volatility and resulting growth both belong to you. The insurer can only deduct a nominal fee for the management activities in the fund.

How to Manage Risk in ULIP Plans?

Managing risk with ULIPs can ensure better growth and stable returns in the long run. So, if you are investing in ULIP Plans for the long term and want to grow your money safely, use one of the risk management options in the plan.

Invest 4G from Canara HSBC Life offers you 4 different strategies to manage risk:

a) Systematic Investment
b) Automatic Fund Rebalancing
c) Return Protector Option
d) Safety Switch

Now let us understand their working briefly.

1. Systematic Investment

If you are investing in an equity fund investing a fixed sum regularly can reduce your investment risk. Because of stock market volatility, regular investment helps you reduce your unit cost of investment.

Invest 4G will enable systematic investment for you even if you are investing in a lump sum once a year.

2. Automatic Fund Rebalancing

This feature allows you to maintain a specific ratio of the funds you have invested in the policy. This is can be of great help when you want to keep a fixed proportion irrespective of the market fluctuations.

Under this option, your funds will get rebalanced to your desired ratio every 3 months.

For example,

  - You decided to invest 50% of your funds in Equity and the remaining 50% in debt.

  - You want this ratio of 50:50 to stay the same throughout

  - Now due to the market fluctuations, your proportion inequity has increased

  - Now after 3 months your ratio will be brought back to 50:50

3. Return Protector Option

Fund switch allows you to jump between various fund options offered by your ULIP Plan. Let’s say you want to play it safe and thus invest 70% of your money in Debt Funds. What now what if a great opportunity comes in the market and you do not want to miss it?

With a fund switch facility, ULIP Plan allows you to switch your funds if you want. While some policies charge for this, plans like Invest 4G involve free fund switch.

4. Safety Switch

Safety Switch helps you to safeguard the corpus you have created through your ULIP Plan over the years. You can activate this when there are at least 4 years remaining in your ULIP Plan.

Your money gets shifted from the funds you have invested into the liquid funds.

This happens at the beginning of each year starting from the 4^th year before the maturity.

Tax Exemption & Bonus Additions

Also, there are other features of ULIP that further reduce the risk factor these plans involve.

1. Loyalty Bonuses

This is the bonus you receive for staying invested for long. Bonus units are added to your fund after every 5th year till the time of your premium payment duration.

2. Tax Exemption

Yes, ULIPs help you save taxes as well. You can avail of a deduction of up to Rs 1.5 lakh on the premium that you pay towards your ULIP Plan.

The above strategies show that ULIP Plans are a great way to grow your wealth. Not only this, with the features it offers, you can also minimize the risk involved with your investment.