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Know Why ULIPs Do Not Invest Only In Equities?

Know Why ULIPs Do Not Invest Only In Equities?

ULIP Investments

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.

ULIP Fund Investments
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.

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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