If you are looking for a financial product offering insurance and investment benefits, you might have encountered ULIPs or Unit Linked Insurance Plans. ULIPs are popular among investors who want to secure their life goals while enjoying life coverage.
But do you understand how ULIPs function and where they allocate your funds? Is it your belief that ULIPs invest solely in equities or the stock market? If so, that’s a misconception. This article will clarify why ULIPs do not restrict their investments to equities and explore the advantages of maintaining a diversified portfolio within ULIPs.
First, let’s address the fundamental question: What is ULIP? ULIPs are life insurance schemes that incorporate life insurance security with the opportunity for investment returns. When you buy a ULIP investment, your premium is divided into two parts. One part goes towards providing life cover, which ensures financial protection for your family in case of your untimely demise.
The other part is invested in market-linked funds of your preference, such as equity, debt, or balanced funds. Tailoring your choices to your risk appetite and life goals, you can select the fund option that aligns best with your preferences. Additionally, ULIPs allow you to switch between funds as your needs evolve and in response to market conditions.
How do ULIPs invest in different funds?
ULIPs invest in different funds by buying units of those funds at their prevailing net asset value (NAV). The NAV represents the price per unit of a fund, reflecting its market value and performance. Units of the selected funds are allocated to your policy account based on your invested premium amount and the NAV of the fund.
The value of your policy account is influenced by the NAV of the fund and the number of units allocated to you. You can conveniently monitor your policy account’s performance online or through periodic statements.
Why do ULIPs not invest only in equities?
Equities are shares or stocks of companies that are traded in the stock market. Investing in equities can offer high returns in the long term, but it also involves high risk and volatility, which are important considerations when making a ULIP investment.
The stock market can fluctuate due to various factors, such as economic conditions, political events, corporate performance, etc. If the market goes down, the value of your equity fund can also go down, affecting your policy account value and returns.
To mitigate this risk, ULIPs do not limit investments in equities alone but also invest in other avenues, such as debt and balanced funds. Debt funds channel investments into fixed-income securities like bonds, debentures, and government securities, offering lower risk and stable returns. However, they may not outpace inflation in the long term. Balanced funds strike a balance by investing in a mix of equity and debt securities, providing a risk-return equilibrium.
By investing in different funds, ULIPs aim to diversify your portfolio and cut your overall risk exposure. Diversification means spreading your money across various asset classes and sectors so that you are not dependent on one source of income or return. Diversification can help you cope with market fluctuations and achieve your life goals more effectively.
What are the benefits of having a diversified portfolio?
Having a diversified portfolio can offer you several benefits such as:
• Higher returns: By investing in different funds, you can benefit from the growth capability of each asset class and sector. You can also benefit from the compounding effect, which means earning interest on interest over time.
• Lower risk: By investing in different funds, you can scale down the impact of market volatility and uncertainty on your portfolio. You can also avoid putting all your eggs in one basket and losing everything if one asset class or sector performs poorly.
• Flexibility: By investing in different funds, you can adjust your portfolio according to your changing needs and preferences. You can switch between various funds as per your risk appetite, life stage, financial goals, etc.
• Tax saving: By investing in ULIPs, you can enjoy tax perks under Section 80C and Section 10(10D) of the Income Tax Act. You can claim a deduction up to Rs 1.5 lakh for the premium paid under Section 80C. You can also enjoy tax-free maturity proceeds under Section 10(10D), subject to certain conditions.
ULIPs are a unique financial product that offers both insurance and investment benefits. ULIPs do not invest only in equities but also in other funds, such as debt and balanced funds. By investing in different funds, ULIPs diversify your portfolio and reduce your risk exposure.
Having a diversified portfolio can help you achieve higher returns, lower risk, flexibility, and tax benefits. To choose the best ULIP plan for yourself, consider your age, income, goals, and risk profile. You can also use online resources to compare different ULIP plans and select the one that meets your needs.