A Unit Linked Insurance Plan (ULIP) is an excellent investment option that combines the elements of both insurance and investment. A part of the premium amount that you invest in a ULIP goes towards providing you an insurance cover, while the rest of the premium is invested in the financial markets. Since some of the premium is invested in the stock markets consistently over a period of time, the potential for returns is much higher than it is with other investment options.
In India, there are several different types of Unit Linked Insurance Plans that cater to a wide range of financial goals and risk profiles. Generally, the various types of ULIP plans can be classified either according to the type of funds your premium is invested in, or according to their capacity to create wealth. Briefly explained below are some of the most sought after types of ULIP investments available in India.
Not all types of ULIP plans investing in the financial markets park investors’ funds in equities. Some of them invest in other financial instruments as well. Explained here are the many types of Unit Linked Insurance Plans based on the kind of funds they invest in.
Here, the investors’ money is used to purchase equity shares of one or more companies. Equity investments are considerably riskier since they’re directly linked to the fluctuations in the financial markets. However, the potential for growth is also greater. This makes ULIPs investing in equity ideal for risk-friendly investors with a high risk appetite.
Under these types of Unit Linked Insurance Plans, the funds are invested in debt instruments such as debentures, corporate bonds, Government bonds and securities, and fixed income bonds. While these instruments carry medium to low risk, the returns associated with them are also only moderate.
Perfect for meeting short-term financial goals, these types of ULIP plans park investors’ funds in highly liquid money market instruments such as treasury bills, call money, and certificates of deposit (CD). Unlike other ULIPs, the maturity period for these funds are relatively shorter and typically range from a few weeks to months. Most of these types of ULIP investments come with strong credit ratings, making them a safe investment option for people with low tolerance to risk.
In a bid to lower the risk factor, some ULIPs invest in a mix of both equity and debt instruments. By allocating one part of the funds to equity and the other to fixed-income debt instruments, the risk is effectively spread out across high-risk and low-risk investment options. As a result, the returns offered by balanced funds are more stable and a lot less volatile than the returns obtained from pure equity funds.
Certain types of Unit Linked Insurance Plans direct their funds towards very low-risk cash fund instruments such as term deposits, cash deposits, and market funds. While the returns that these types of ULIPs offer are the lowest among all the other available options, the risk factor is also negligible. This makes them an excellent choice for investors who are highly risk-averse and wish to eliminate it as much as possible.
ULIPs based on wealth creation
Unit Linked Insurance plans are also classified according to their capacity to create wealth. These plans are formulated solely for the purpose of maximizing the return on investment. Listed and explained below are some of the different types of ULIP plans that focus on wealth creation.
Single premium and regular premium ULIPs
As the name suggests, a single premium ULIP plan only requires a one-time premium payment due at the time of purchase. On the other hand, a regular premium ULIP allows you to pay premiums periodically throughout the tenure of the plan, right from purchase until maturity. Based on your financial situation, you can choose to pay the premiums in monthly, quarterly, semi-annual, or annual instalments.
These types of Unit Linked Insurance Plans operate on the assumption that the risk-taking ability of investors goes down as they grow older. Therefore, these plans invest a part of the premium in equity instruments and the remaining premium in debt instruments. Initially, a higher proportion of investment goes towards equity rather than debt.
As the investor ages, these types of ULIPs progressively increase the proportion of investment in debt instruments and decrease the proportion of investment in equity. This effectively shifts the focus towards stable returns on investment and preservation of wealth, by lowering the risk and volatility of returns.
Guaranteed and non-guaranteed ULIPs
The primary focus of guaranteed ULIPs is capital preservation. These types of ULIP plans limits your exposure to market risk by investing only a small portion of your premium in equity. Guaranteed ULIPs are ideal options for people looking for stable returns over a longer period of time. Conversely, non-guaranteed ULIPs focus on maximizing wealth creation by allowing you to invest a greater proportion of your premium in equity markets. The returns that non-guaranteed ULIPs offer are higher, but more volatile.
These classifications go on to show that you can choose a ULIP scheme that fits in with your risk appetite and your overall financial goals. At Canara HSBC Oriental Bank of Commerce, you can invest in the Invest4G ULIP plan, which gives you the option to choose from 7 different funds with varying risk and reward equations. The plan also allows you to switch and redirect your money between different fund options, so you can cater to your changing risk appetite and take advantage of market fluctuations.