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A Unit Linked Insurance plan gives away the dual benefit of insurance for financial protection and investment for wealth creation in the long run. A ULIP divides your premium into two components, one of which pays for the insurance premium and the other grows in the market. The latter component is more dynamic and brings a variety of choices for you to plan your expected returns. You can choose your investment avenues, switch between them and also strategize the portfolio.
When planning to invest in a Unit-Linked Insurance Plan (UILP), a common question that may come up is about the returns from investment. People often tend to believe that their premium would only be invested in equity, which is the most prone to market risks as compared to other fund options. However, this is a misbelief and should not make you postpone your investment plan.
ULIP, a solely equity investment is a Myth!
The absolute truth is that ULIPs invest in a variety of funds depending on your term and risk appetite. A ULIP can be invested in equity funds, debt/ bonds, or a balanced fund, which is a combination of both, according to the preference of the policyholder. After all, the purpose of the investment component in a market-linked product exists for wealth creation over a period of time, which can be achieved by investing in a way that maximizes returns.
Maximizing returns does not have to always mean that the risk increases too. ULIPs are unique products that allow you to spread your investment across multiple funds and the choice is yours, your portfolio is aided by expert guidance of your fund manager. You also have the option of fund switching with unit-linked plans, whereby you can move your investment amount from one fund to another, for best utilization of the market situation.
|High Risk Appetite
Fund Type: Equities
|Medium Risk Appetite
Fund Type: Balanced
|Low Risk Appetite
Fund Type: Debt & Bonds
|Invests in equities & stocks of companies||Invests in fixed components like corporate bonds||Invests in debt funds, corporate bonds & government securities|
|Higher risk, higher returns||Medium risk, mostly stable returns||Low risk, fixed and timely returns|
Understanding debt and equity funds:
Equity funds are among the most popular for high return investments. Equities invest your money into equity shares of different companies. These funds are classified basis the company size, investment style and geography of the holdings, along with other factors. Though equity funds are sensitive to economic inflation, currency fluctuations, tax rates, and other factors, they often yield high returns in the long run, especially when compared to debt funds.
Debt funds, on the other hand, invest your money in fixed income securities of the government such as bonds and treasury bills. These bonds could vary from short to long-term, money market instruments, securitized products, or floating rate debt. Debt funds can provide higher returns when compared to fixed deposits, although they offer less returns in contrast to equity funds.
So, what would be an ideal choice for you? For investors who are not willing to take risks, experts often suggest debt funds, while equity funds are ideal for investors who want higher returns and are willing to stay invested for longer durations. Thus, your investment choice shall solely depend on your risk appetite. Unit-Linked Insurance Plans, however, offer options for both equity and debt funds.
ULIPs come with a five year lock-in period to help ensure that you invest in a disciplined manner through regular premium payments to keep the policy active, thus allowing for creation of wealth in a systematic manner.
Understanding fund switching between equity and debt in ULIPs:
Yes, Unit-Linked Insurance Plans let you switch funds! With a ULIP, you are equipped with the option of fund switching, wherein you can make use of the market fluctuations to grow you wealth in a thoughtful manner. Depending on your risk taking ability (the magnitude of risks you are willing to take), you can build a portfolio with a combination of debt and equity fund investments.
Your long-term financial goals must ideally govern your portfolio. While fixed returns from a debt fund may seem like the safest investment option, you must not make the mistake of avoiding equity all together. Though the first can assure you returns, investing about 15-25% of your total portfolio in equity can help fill in any gaps and invest in products that fit your portfolio and are in line with your financial needs.
A Unit-Linked Insurance Plan lets you, the policyholder explore avenues to earn market-linked returns along with the assurance of financially safe future for your loved ones. These plans are structured for goal-based planning and therefore, allowing you to systematically invest in a plan that works to fulfilling your specific financial goals.
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