Know Everything About the Switch Funds Option In ULIP

Among the different life insurance plans to choose from, a Unit Linked Insurance Plan or ULIP is a unique option that offers insurance and investment in one policy. While it isn’t the only insurance cover that provides returns, it sure does offer transparency of the investment. Thus, a ULIP plan is also known as an insurance-cum-investment policy. 

ULIPs allow policyholders to avail flexibility in their investment, where a part of their premium is invested in market-linked securities. The other part is used to provide life insurance coverage. Besides that, a ULIP plan also has a mandatory lock-in period for five years. Among the many features that ULIPs have, fund switching is a smart feature that allows policyholders to change their investments among different funds. This way, a policyholder can amend their investment depending on their financial requirements and on the basis of the progress of the tenure. 

Here’s all that you need to know about fund switching in a ULIP plan:

When you purchase a ULIP, the premium is divided in two parts, based on the pre-decided terms of the policy. One part is attributed towards life insurance, offering protection against events like death and disability, while the other part of the premium is invested in different types of funds. They can be equity funds, debt funds, balanced funds, liquid funds, and even cash funds. The choice of fund to invest in depends on the risk tolerance of a policyholder and their financial goals. 

For instance, if you are a risk-taker, you might choose to invest in an equity fund where investments are made in stocks of different companies. On the other hand, for a risk averse investor, the same investment may be in a debt fund, where bonds, debentures, treasury bills, etc. are the various investment avenues. However, when buying a policy, you can opt for a mixture of either type of funds. So, to hedge the risk, you can bifurcate your investment in a 70-30, mix where 70% is invested in equity funds, and the balance 30% in debt funds. 

Young buyers of a ULIP plan generally opt for a riskier investment at the beginning and slowly begin to switch to a more stable investment, as the ULIP tenure comes to an end. To move your investments, the fund switching option comes handy. This option allows you to change the funds among the same plan and transfer the units, either wholly or partially to a different fund. Fund switching can also be used to weather out any loss-making investments and move to a more profitable fund. Depending on the terms of the insurance policy, charges may be levied while making the switch to a different fund. Some insurance companies even allow fund switching for free. 

How to decide when to switch your fund?

Looking at the fund’s performance, you can switch them depending on your financial goals. While tracking its performance, the Net Asset Value or NAV is a critical determinant that helps measure the profits or losses earned. The NAV also helps estimate the past records based on the growth in NAV over the investment tenure. 

As the financial markets cannot be exactly predicted, it may be difficult to ascertain the right time to make the switch to a different fund. But, using the option of fund switching, you can optimise your investment. In case the markets are on a decline, you can divert your equity fund investments to debt funds and redirect them back when the growth picks up. Further, in case of a short-term financial goal like marriage or buying a house, you can invest a sizable portion of your ULIP investment into secure funds in advance. 

What are the advantages of switching your fund?

• Fund switching allows you to tailor your investments based on your risk appetite. Changing risk preferences as you grow older can be accordingly modified, using the fund switch in ULIP plans.
• As pointed above, it may not be always possible to predict market movements, however, using the fund switching option can help you minimise your losses or maximise ULIP returns. 
• Fund switching also allows you to realign your portfolio based on your life goals. For instance, at the beginning of the ULIP plan, most of your investment is made in equity funds, while gradually switching to balance funds and further to debt funds. The goal of the investment can be changed from wealth creation to capital preservation, and it can be accordingly modified in the ULIP. 
• Since fund switching does not attract capital gain implications, it aids in a more effective asset allocation. 

A ULIP calculator is a nifty tool that is provided free of cost to policyholders by insurance companies. Using the ULIP calculator, you can determine how much investment needs to be made in a fund that offers specified return for a specific duration. 

Since ULIP offers protection and investment in one plan, make sure to take advantage of the policy and achieve your wealth creation goals along with choosing adequate coverage for your dependents.