ULIPs or Unit-Linked Insurance Plans are some of the most innovative investment options out there for individuals since they offer the dual benefits of life coverage and wealth creation through investment in market-linked instruments. Yet, it is not enough to just invest in a ULIP; you need to adopt intelligent strategies to maximize performance while limiting risks.
Understanding the Investment Component of a ULIP
The insurance component of a ULIP is elementary. There is a guaranteed sum assured paid out to the policyholder’s nominees in case of their death within the policy tenure. For the investment component, the premiums you pay are deployed (after deducting applicable charges) in equity, debt, and balanced funds, which are market-linked investment instruments. These earn you future returns.
With this component, investors can amass a sizable future corpus by the conclusion of the policy period. But, the accumulation of this wealth is subject to market performance, and that is where portfolio strategies assume importance. There is a need to balance limiting your risks and scaling up your returns, depending on market conditions and fluctuations.
All policyholders can choose the portfolio of funds they wish to invest in, with innovative fund-switching features available to them. For example, if you have a slightly higher market risk tolerance, you may incline more towards equity funds. Those with lower risk tolerance may choose more debt funds instead. You can also keep changing your investment preferences with age and evolving risk appetite. Fund switching is what makes it possible.
Finally, because these policies come with investment components, insurers have ULIP plan calculators on their websites to help you estimate the returns you can expect for your ULIP policy.
Types of Portfolio Strategies available
There are several portfolio strategies that you can choose from. Some of the most common strategic options include the following:
Based on Market Triggers
If you adopt this strategy, you will have to keep an eye on price trends and fluctuations in equity markets while responding to the same. This strategy can also be adopted if you opt to have your fund managed by the insurer. Here are some of the core points of this strategy:
- You should always buy low and sell high.
- You should first allocate your money across equity and debt in a particular ratio (75:25 is usually recommended).
- With market shifts, trigger events happen automatically, and your fund manager will likewise rebalance the portfolio.
- Trigger events are primarily activated when prices tilt upwards by 15% or more for equity.
- The equity part of the investment basket will increase after that.
- You can tap into higher returns by rebalancing the portfolio.
Wheel of Life
This strategy functions on the principle of leveraging higher equity returns early on in your investment cycle, when you have a higher capacity for taking risks, and then gradually switching to lower-risk options as you progress. Here are the core points that you should keep in mind:
- You will first allocate 100% of your investments towards equity.
- This will be spread throughout mid-cap, large-cap and other types of funds.
- Over time, you will gradually lower your equity exposure.
- Funds will be reallocated towards more bonds, debt, and liquid funds as the policy tenure is nearing completion.
- This shift will continue until your equity allocation reduces to 0% and 100% is invested in debt funds.
Investor Selectable Portfolio
Another interesting plan of action, this strategy involves the investor taking complete control over the proceedings. The core points include the following:
- Investors will manage and select their allocations without any external supervision/guidance.
- They can allocate money through various kinds of funds/assets.
- They can keep switching assets/funds based on their changing levels of risk and in response to market shifts.
Auto Transfer Portfolio
This strategy allows investors to assume moderate risks by suitably diversifying their assets. The core points for this are as follows:
- You will initially go for funds with lower risks, i.e. liquid funds or bonds.
- However, at the beginning of every month, a particular part of this investment amount will go into other types of funds that you can choose.
- You can select funds based on your future goals and risk tolerance levels.
- You can systematically spread out your investment throughout multiple funds/assets, thereby diversifying your risks in the process.
How to select a suitable portfolio strategy
Which portfolio strategy is the right choice for your needs? Here are some things that you can keep in mind:
- Trigger-Based Strategies – They are ideal for newcomers who require professional support and guidance. It is also suitable for those who wish to monitor investment-related risks closely.
- Wheel Of Life – This suits you if you are looking to build a corpus for meeting future needs like higher education for your kids or buying a home.
- Investor-Selectable Portfolio Strategies – These are better suited to those with a comprehensive understanding of the markets and those who consistently do their homework on the same.
- Auto-Transfer Portfolio Strategies – They are better for investors who wish to scale up returns while diversifying their investments simultaneously.
Take your time and work out the portfolio strategy that suits you and your needs in the best possible manner. As with any investment, do not rush things. Instead, do your research and zero in on the right strategy to optimize your ULIP returns.
