ULIPs or a Unit Linked Investment Plan is one of the most popular life insurance products for wealth creation. Ulips make the ideal investment choice if you are looking for good returns on your investment without risking too much on market volatility and also avail tax benefits. However, to maximize your returns on your ULIP Investment there are a lot of factors that you need to consider.
To get better returns you also need to monitor your market investments. This would involve some research on historical returns, market trends, and stock performance almost on a daily basis.
So, ULIPs help you enter the equity market in the most cost-effective manner and make sizeable returns on your investment over a period of time. They are basically, life insurance plans with an added advantage of the capital market investment. And there are a number of ULIP plans from top life insurance companies that help your invest a portion of your in some of the best investment funds.
However, in order to get better returns, there are certain tips that you need to follow to make the most out of your ULIP Investments. Below are some tips that you can follow:
ULIPs have a lock-in period of five years that’s why they make a perfect investment option for those who are looking for a long-term investment plan.
Let’s say if you stay invested for 10 to 15 years, you can benefit from the power of compounding. It simply means that the money that you invested will be reinvested for the principal amount to grow year after year.
If your investment is linked to any financial goal and you are serious about creating wealth it is advisable to stay invested for at least 10-15 years. If we look at the historical returns that ULIPs have generated so far- it is 12% to 15% of return in the long-term.
Equity and debts funds have different characteristics. Equity schemes are considered as high-return as well as high-risk value funds. On the other hand, debt funds are considered as low/stable return and lower risk funds over a period of time.
ULIP investments in Debt schemes reduce the risk quotient. To create a balance of both, there are balanced funds also. However, ULIP investments only have 40% equity exposure that makes them a comparatively safer investment options.
Unit Linked Investment Plans offer the option of free switches between the funds, to help you effectively manage your portfolio asset allocation. The best way to maximize your ULIP returns is to spread your ULIP investments across different asset classes.
This will help you create a diversified portfolio and in case there is a loss in a particular asset class, it can be balanced by the profits earned on another asset class. This way it reduces the risk on your overall investments. If you are able to correctly optimize your asset allocation strategy, you can determine the risk to return ratio on your investment portfolio.
Henceforth, optimizing asset allocation by simply investing in different asset classes can save you from the losses that may incur if you stay invested in a single asset class.
Moreover, your ULIP investment can easily be switched between different asset classes like equity, debt, depending on your risk appetite and the financial goals that you have set for yourself. The decision that you will take will have an impact on the returns.
Let's understand this with an example: Mr. Sharma, a 32-year-old professional, has invested in a ULIP plan for the duration of 30-years. If he has invested in equity schemes, how should he optimize his asset allocation?
In this case, Mr. Sharma can maintain 100% of his ULIP investment in equity schemes. Let’s say after five years, as Mr. Sharma has children and his financial responsibilities increase, he can reduce his equity exposure by 20%.
In the same way, he can reduce his equity exposure in an interval of five years and switch to debt funds.
Ideally, he should be reviewing his ULIP investments every year and continue to maintain this asset allocation every five years, and only keep 20% of his investment in equity schemes
The motive to start investment is primarily wealth creation and to save for future investments like your child’s higher education, your own house, children’s marriage, retirement, etc. Therefore, your financial goals play an integral role in defining your risk appetite.
For instance, if you are investing to build the corpus for your child’s higher education then the basic thumb rule is to switch from equities to debt once you have built the corpus in the initial years and are closer to withdrawing funds. This is an effective way to save the corpus that you have built over the years and utilize it to pay your child’s higher education fees.
It makes sense to invest in Ulips if only you have some risk appetite and are comfortable timing the market. As ULIPs offer life insurance cover, the beneficiary of your ULIP plan either receives the fund value or the sum-assured, whichever is higher at the time of claim post your demise.
Once you survive through the maturity term of your ULIP plan, you get the fund value. While staying updated during the course of your policy would ensure that you or your beneficiaries get a higher fund value benefit at the time of maturity or case of your demise
As you know that ULIPs have a lock-in period of five years, it automatically inculcates the habit of saving and helps you generate compounding returns on your long-term ULIP investments. Some insurance companies provide loyalty benefits to the investors by paying back all the charges that were levied at the time of activation. These charges include policy administration charges, fund management charges, surrender charges, and mortality charges.
ULIPs make a perfect investment choice when it comes to maximizing returns with market exposure and also keeping up the protection portion with life insurance cover. It encompasses financial protection to your family along with the option to grow your funds. Not only that ULIPs are versatile in terms of being an investment as well as an insurance plan, but it also helps you in saving tax with controlled market risk.