Many people are keen on ULIPs as they offer the dual benefit of insurance and investment. A portion of the premium can be invested in debt and equity funds for the purpose of wealth creation. The rest can be used as life insurance, to secure the financial future of your loved ones. ULIP is ideal for anyone who can stay invested for a long time, since this harnesses the power of compounding. Along with achieving different financial goals, a ULIP investment offers tax benefits under the old tax system.
All these benefits come with some risks. It’s important to understand these, to make an informed decision. Since a certain portion of your ULIP is invested in equities, stock market fluctuations can result in varying returns or even losses. However, a ULIP is only as risky as you make it. Read on to find out.
Understanding ULIP Risks
Equities have historically delivered higher than inflation returns. However, since stock markets can be highly volatile, you could lose some of your investment due to these fluctuations. Investing in stocks is a higher-return, higher-risk approach. You can always choose the proportion you invest in equities based on your risk appetite.
How to Mitigate ULIP Risks
To reduce ULIP risk, you can choose to diversify your portfolio with a larger portion of debt funds. Although these tend to offer lower returns than equities, they are more stable and low-risk, and meant for people with lower risk tolerance.
Alternatively, you can stay invested in equities for an extended period. Resisting the urge to sell stocks the moment the market looks bearish can help you stay invested and reap the benefits of long-term growth. This is because past performance indicates that the magnitude of market gains has generally been higher than the losses.
Work with your fund manager to tailor your financial strategy to your goals and objectives. It is necessary to understand the intricacies of this policy to make decisions that are appropriate for you.
Consider auto rebalancing the portfolio. This means the capital is automatically switched to debt funds when the stock market appears bearish. It is a way to ensure your ULIP investment is protected from volatility.
Another way to lower ULIP risk is to begin with higher-risk instruments and gradually move to moderate to low-risk instruments when you are about to reach your financial goals. This is possible since ULIPs offer the flexibility to switch funds based on your risk attitude.
You may get a certain number of free fund switches in a year. It will depend on the ULIP provider. With certain firms, you will have to opt for this facility since it may not be automatically available.
What Happens to the Life Cover?
Typically, ULIP risks do not extend to insurance. Irrespective of the market situation, the death and maturity benefits do not change.
ULIP lets you have complete control of your money. The mantra to maximise the benefits is to start early and pay premiums on time. Consider an investment horizon of at least five years. Review your investment portfolio once every six months, so you can personalise the investment as per your current risk appetite.
