Unit-Linked Insurance Products (ULIPs) are the only insurance product offering dual benefits of insurance and investment. Apart from being transparent, ULIPs offer a variety of options to safeguard your returns from the market volatility. Fund switching is one such option that allows you to tweak your fund portfolio to keep it safe from fluctuations. Switching in ULIPs is convenient and doesn’t attract tax penalty. Read on to know about this feature.
Benefit of Switching Funds
The primary objective, and therefore the benefit, of switching funds is to leverage from funds performing well. If one or more funds in your portfolio are not yielding profits or performing much lower than their peers, you can exercise this option. You can transfer units fully or partially into different fund options — equity to debt and vice versa. But to ensure the switch works in your favor, keep a track of fund performance as it will enable you to make an informed decision. It’s easy to track your scheme’s performance in a ULIP as insurers declare funds’ net asset value periodically.
When to Switch Funds
Although it is not possible for investors to anticipate losses or profit, you can switch to safer funds and optimize investments if you foresee a drop in the market. You can transfer a large portion of your investments to debt funds and then switch them back into equity once the market rises. If your policy is about to mature or if you are nearing your financial goals, such as child’s education and wedding, you should park a sizeable part of your capital in safe debt a few years in advance.
Let’s understand it with an example. Mr. Ram Prakash, a 24-year-old individual, has invested Rs 1 lakh in an all equity ULIP fund for 35 years. Initially, Mr. Ram can maintain 100% of his investment in equities. But once he settles down and has a family (say six years), it would not be wise to park his entire investment in an all-equity fund. He should, perhaps, move 15% of his investment to debt in order to safeguard his money.
Impact of Switching Funds on Insurance Cover
The answer to this depends on the type of product you have bought. On maturity, some insurers offer sum assured or fund value, whichever is higher, while others keep the payouts for insurance and investment separate.
- When insurers offer either sum assured or fund value: In this scenario, mortality charges are calculated as the difference between the sum assured and fund value. Therefore, you should be extra cautious when switching funds as the insurance amount will vary as per the investment value. Note that switches in the initial years of investment will not affect the insurance cover but it is advised to change your asset allocation towards debt when you are near maturity to avoid surprises.
- When insurers offer separate payouts for insurance and investment: Here, mortality charges are calculated on the entire sum assured for the policy tenure. The insurance cover is decided at the time of buying the policy. As a result, any change in the portfolio will not affect your insurance coverage.
Charges Levied on Switching Funds
Most of the insurers do not charge for the initial 5 – 10 switches. For instance, HDFC Life’s Click 2 Invest gives you 4 free switches in a year. But if you exceed this limit, a nominal fee from Rs 50 to Rs 500 is levied.
Process to Switch Funds
Insurers offer the following two options to execute the Switch Fund request:
Option 1:- Form Submission
Submit a duly-filled and signed endorsement form at the insurer’s nearest branch. You need to mention the exact details of the amount to be transferred, existing fund plan and new fund option chosen. Based on your fund switch request, current funds will be allocated to the new fund option.
Option 2:- Insurer Portal
Policyholders can manage fund switches through the self-service facilities offered by life insurance companies on their portals. Log on to the insurer portal with your user name and password. Once you enter the percentage of funds to be transferred from the old fund to the new fund, the insurer will process your request shortly.
If you are not market-savvy or do not have the time to track the market, you can opt for the automatic switching option. Under this option, your fund manager will switch your funds between equity and debt on your behalf.
Switching allows investors to insulate themselves from market fluctuations to a great extent. However, exercise this option wisely.