Harish was planning to invest in a Unit-Linked Insurance Plan (ULIP) to have an insurance policy, which would also provide returns on a part of the premium. He was, however, confused about the returns from his investment. Harish often wondered whether his premium would be invested only in equity, which was more prone to market risks as compared to debt funds. This made him to postpone his investment plan.
Then one day, he heard his colleagues discussing about ULIPs . Harish asked his colleagues, many of whom had invested in ULIPs, whether Unit-Linked Insurance plans were invested only in equity markets. They clarified that ULIPs could be invested either in equity or debt, or a mix of both, according to the preference of the subscriber. Harish also had the option of fund switching, whereby he could move his investment from one ULIP fund to another. Yes, ULIPs give an option to switch funds! It meant that within his plan, he could transfer units fully or partially between ULIP funds—equity, debt or a combination of both.
Understanding debt and equity funds: Debt funds invest any shareholder's money in fixed income securities such as bonds and treasury bills. These could be short-term, mid-term or long-term bonds, securitized products, money market instruments or floating rate debt. Although debt funds provide higher rate of returns vis-à-vis fixed deposits, they offer less returns when compared to equity funds.
Equity funds invest an investor’s money into equity shares of different companies. These funds are categorized according to company size, geography and investment style of the holdings in the portfolio along with other factors. While debt funds are ideal for investors who are not willing to take risks, equity funds are suitable for investors who want higher returns, and are willing to take considerable market risks. A debt fund is relatively safer as compared to an equity fund as the former is generally invested in rated and risk-free government and corporate bonds. But, equity funds are sensitive to economic factors like inflation, tax rates, currency fluctuations and bank policies.
Thus, investment in debt or equity is based solely on the risk appetite of the investor. Unit-Linked Insurance Plans, however, invest in both equity and debt funds. An investor can also choose a portfolio, which has an amalgamation of both.
Understanding ULIPs and their investments in debt and equity: A Unit-Linked Insurance Plan is a mix of insurance and investment that allows policyholders to earn market-linked returns along with the security of life insurance. The insurance company provides life cover with a part of the premium collected through ULIPs, while the balance is invested in equity or debt markets. One of the biggest advantages of a ULIP is that it’s structured for goal-based planning. This means that investors can systematically invest in a ULIP plan with the aim of fulfilling specific financial goals. The five year lock-in period ensures investor discipline, where they must make regular premium payments to keep the policy active, thus allowing for systematic creation of wealth for the desired financial goals.
Understanding fund switching between equity and debt in ULIPs : Unit-Linked Insurance Plans are equipped with the option of fund switching, which provides considerable flexibility to this investment product. This provides any investor with an option of investing into either debt or equity funds, or a portfolio with a combination of both debt and equity funds. Switching of funds is completely dependent on the risk appetite of the investor, which simply means the magnitude of risks anyone is willing to take in any given market scenario. It also depends on the long-term financial goals of an investor. Many insurers advise that, over a long-term period, investors could take more risks by earlier investing in an equity fund, and then shift to debt fund in the face of approaching maturity. This is often referred to as ‘Years to Maturity’ based portfolio management.
Conclusion: Although Unit-Linked Insurance Plans invest in both debt and equity funds, they cushion investors from any sudden volatility in the market by striking a balance between both the funds.
ULIP calculators are provided by Future Generali to help calculate the cover amount and corpus according to the requirement of an investor. These calculators help in calculating the expected value of an investment in the future. One can input details such as the investment amount and investment frequency, besides the number of years one wants to invest. If you really want you investment to be big, try investing in the Future Generali Big Dreams Plan.
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