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When is the right time to switch funds in a ULIP?

right time to switch funds in a ULIP
What is fund switching?

Switches are options given to policyholders of ULIPs to move their investments from one fund to another, within one plan. You can transfer units fully or partially between fund options — equity, debt and equity to debt. Typically, ULIPs offer pure equity, debt and balanced fund options to their customers. Mostly, each Ulip can invest in a minimum of four-five funds. And, the policyholder is allowed to choose the funds where his/her money will be invested.

Most ULIPs do not charge for the initial five-six, or even eight, switches at times. For more than this, they may charge anywhere around Rs 50-300. Some companies have eliminated this cap on free switches altogether in policies launched after September 1, 2010, enabling policyholders to make as many switches as they wish during a policy year.

Before knowing about when to switch funds in ULIPs, you must know the benefit of switching. Switching is the best feature in a ULIP because it allows you to move out of loss-making funds. Policyholders should track the performance of their ULIP and switch when necessary, as the premiums are reasonably high and losing money after that will not serve the purpose.

You can track your schemes’ performance in a ULIP, since the net asset value is declared periodically. Even at the time of investing, you get all details (fees and expenses deducted) or the break-up of the premium and the total amount invested.


How does Fund Switching in ULIP work?

Your money in ULIP can be invested in different sorts of equity and debt funds. As an investor, you have the choice to move between different types of funds floated by your insurance company to suit your needs. This facility offered by the insurance company in ULIP investment is called fund switch. So, if you are not happy with the returns from your ULIP, you can move to equity fund from your debt fund using this mechanism. In the same manner, if you want a steady income flow, switch to debt funds. If you want a mix of both, you can split the proportion of debt and equity funds as per your requirements.

Best time to switch funds

ULIPs give the opportunity to get returns on your investment . This feature makes it stand out from other insurance products. The switch fund gives you an added benefit to make healthy returns through volatile market conditions. As you know, the stock market goes through highs and lows. If you want to make returns irrespective of the market cycle, you will have to modify your investments regularly. It does not mean you need to redeem your ULIP units but you can make alterations to your ULIP funds by using the switch option. For instance, suppose 70% of your premium investment was in debt and 30% in equity. If market condition is turning positive, then that is the time to switch your funds to equity schemes, and only put 30% in debt schemes as a safe investment. Once, the market cycle turns negative, you can play safe again and exit from equity schemes and invest majorly in debt. Freedom to make such changes can help you take advantage of all kinds of market phases and optimize your returns.

But it’s just not about external factors that will determine when to switch funds in ULIPs. Your life cycle stage will also play an important role in your decision of how you want your investment portfolio . If you are young and don’t have any dependents or any other responsibilities or obligations then you can take a risk in your investments. In further stages of your life, you might need to play safe because you may have dependents at that time so you can switch your fund allocation more towards debt funds.

How much does switching cost in ULIP?

Now that you are more or less aware of when to switch funds in ULIPs, you must know about the switching cost associated with it as well. Some companies offer unlimited switch options in ULIP, others have a cap of 5 to 10 switches. Beyond that, a fee of Rs.50 to Rs. 500 is charged per switch. To make switching work, you need to constantly review and monitor your plan’s NAV, as market conditions frequently change. If fund switch option is used properly you can make good returns on your investment.

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