fund switching in ULIPs

Ashok 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. Though he was aware of the overall policy, little did he know that ULIPs also had an option of fund switching, whereby he could maximise returns from the market even while minimizing risks. He asked his friend, a financial consultant, who explained to him that Ashok could leverage the feature of fund switching to optimize his returns effectively. Rakesh could freely switch between different assets like debt, equity or a mix of both on the basis of his risk appetite and long-term financial goals. Now Rakesh is not only protected by market fluctuations, but also gets a handsome return on his investment, thanks to the option of fund switching!


What are ULIPs?

With the arrival of Unit-Linked Insurance plans, the boundaries between investment and insurance products have blurred, and now ULIPs have gained widespread acceptance. A ULIP 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.

The major highlight of any ULIP plan is that it provides at least 10 times of the annual premium as a life cover, while some plans may even more, depending on the investor's preferences and the choice of policy. To know what is ULIP in detail, keep on reading.

What exactly is fund switching?

Unit-Linked Insurance Plans are equipped with the option of fund switching, which provides considerable flexibility to this financial product. This provides an investor with the option of investing into either debt or equity funds or a portfolio with a combination of both debt and equity funds. Within a plan, a policyholder can move their investments from one ULIP fund to another. They can transfer units fully or partially between ULIP funds, which include equity, debt or a combination of both.

What are the key factors to consider for exercising the option of fund switching? 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 volatile market scenario. It also depends on the long-term financial goals. Many insurers advise investors that, over a long-term period, investors take more risks by earlier investing in an equity fund earlier, and then shift to debt fund in the face of approaching maturity. This is often referred to as ‘Years to Maturity’ based portfolio management. It operates on the fundamental principle that equity funds are more prone to market risks as compared to debt funds, and the investors even while taking market risks cushion themselves from any sudden volatility in the market by striking a balance between both the funds.

An investor can easily avail of fund switching, if he is not happy with the fund’s performance after tracking the performance of the specific Unit-Linked Insurance Plan when its periodic net asset value is declared. Anyone can exit from loss-making funds. In case of a sudden dip in the market, investors can transfer a major portion of their funds to the safer debt funds, and switch them back into equity funds once the market is on the rise again. This enables investors to reduce risks, besides protecting their capital.

Is fund switching chargeable? Does the investor need to be market-savvy?

A majority of the Unit-Linked Insurance plans do not charge for up to eight switches at times. If an investor wants to switch even more, a minimum amount as fund-switching fee is charged. Many insurance companies, however, have removed the cap on switches completely to enable policyholders to make as many switches they wish to make during a policy year. For investors who are not market-savvy, or simply do not have the time to monitor the market to take a decision for switching, many insurers provide an option for an asset allocation fund, where the insurer’s fund manager switches between equity and debt funds after considering the existing market scenario.

Future Generali Big Dream Plan is a smart investment option; being an insurance plan that doubles up as an investment product. With this plan, one part of the investor’s money goes into a life cover , and the remaining is invested in debt and equity instruments that earn returns over time.Learn more about fund switching in ULIP and also partial withdrawal.