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Here is how fund-switching in ULIPs helps you customise your portfolio

How Fund Switching in ULIP works and helps

A Unit Linked Insurance Plan (ULIP) is a unique financial instrument that combines aspects of both insurance and investment. Under the investment portion, ULIPs are even more dynamic - they provide you with the choice for your investment destination. You can choose to alter your portfolio in accordance with your risk appetite. Future Generali ULIPs, for example, offer investments across:

  • Equity funds that primarily invest in equities and stocks of companies
  • Fixed Interest and Bond Funds that operate on low risk and reap assured return
  • Cash funds that provide high liquidity
  • Balanced funds, that create stable returns by allowing investments in different places. How you choose to allocate your funds determines how much you can earn, keeping in mind the general rule of thumb that higher risks can reap higher returns.
What makes ULIPs dynamic?

The choice ULIPs offer is not the only attribute making them dynamic - they also give the flexibility of free switches between funds. This room for fluidity across funds can go a long way in helping you effectively manage the portfolio asset allocation.

Fund switching is a feature offered by most ULIP plans, including the Future Generali ULIP plans. This feature allows you to transfer some or all the units from an existing fund into one or more funds. For the purpose of switching, the existing Unit Price of the fund, as on the day of the switch, is taken into account. Rules state that you can switch between fund options without any additional cost, for up to 12 times in a policy year. After that, any subsequent switch would incur a charge of Rs. 100 each. Subject to IRDAI approval, these charges may, in fact, increase up to Rs 250 in the future.

How is fund-switching beneficial?

Switching is the best feature in a ULIP because it is a kind of an exit option from loss-making funds, and therefore acts as a safety valve against fluctuations. The net asset value is declared periodically, and you can track the performance of your funds in a ULIP. Therefore, switching enables you to refactor your portfolio in order to optimize returns.

When to make the switch?

It is hardly possible for anyone to accurately time and predict the markets, but you would like to anticipate the fluctuations beforehand to be able to switch to safer funds in case we foresee a downfall in the performance of a fund, or to switch to a riskier one when the circumstances appear bullish to optimise investments.

So, when is the right time to make a switch and customise your portfolio?

1 When there is a sense of market volatility:

If you feel that the market is inclined to have a downward phase, you can customise your portfolio by exiting funds which are potentially loss-making. Instead, you can divert your funds towards risk-free fixed income instruments. Once the market has corrected itself, you can switch back to equities to leverage the upswing in the market (though, don’t switch back when the market is at its peak!)

2. If there are changes in your lifestyle that elicit financial changes:

You will tend to get more risk-averse as your financial obligations increase and as you get older. For example, if you’ve just had a kid, and you want to get into investments that provide stable returns, you might want to switch the ULIP fund investments to the less risky alternatives like cash and debt funds.

3. Nearer to policy maturity:

This customisation option also comes in handy when your policy is about to mature. You wouldn’t want to lose out on all the returns you have earned so far amid the market volatility, so it is better to switch to safer funds like debts. This insulates you against the worst-case scenario: a sudden shock in the market and you could stand to lose all your returns, with not much time left in the policy to be able to recover the lost money.

In a nutshell

There is no gainsaying that if you are able to change your portfolio in tandem with the market situations, you have a better chance at insulating yourself against the volatility and subsequent losses. Therefore, the fund-switching option under ULIPs is nothing short of an opportunity. The bottom line is that you should use this feature to your advantage and optimize your asset allocation in accordance with your needs.

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