4 tips to get the best out of your ULIP

The introduction of LTCG tax on equity and equity oriented mutual funds have put ULIPs in focus as they do not attract LTCG (as per current tax laws). Most insurers have started pitching ULIPs as an alternative to mutual funds and stocks. One of the USPs of an ULIP is the flexibility and control it offers the policyholder unlike traditional life insurance. However, this control and flexibility translates into responsibility in the policyholder’s hands to manage his ULIP investments well. Simply buying the best available ULIP will not result in superior returns. Reviewing the policy at regular intervals and making necessary changes as per the market conditions, life stage, goals etc alone will ensure that the policy fund registers a stellar performance. Let us look at the various ways in which you can maximize the potential of your ULIP:

1.       Asset allocation: First and foremost, when you buy an ULIP you need to define the asset allocation. As per Investopedia, asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. Some critical points to consider for asset allocation are as under:

Equity investments have the potential to generate high returns however they also represent high risk. Debt instruments are relatively safer but generate reasonable returns. Debt works best for conservative and risk averse investors. Balanced funds have a mix of equity and debt in varying proportions and are for those who wish to take on moderate risk. Do choose funds as per your risk appetite and comfort level.

Further, it is not wise to look at your ULIP in isolation for the purpose of asset allocation because the ULIP is not going to be your only investment. You will also have PPF, fixed deposits etc which represent the debt portion in your asset allocation. These also need to be considered when you determine the equity/debt ratio for your ULIP.

2.       Fund switch – This feature allows you to switch your funds between the various funds available under the plan. For eg: If the market is going down, you may opt to switch from your equity fund into a debt fund to protect the returns generated so far from volatility.

Once the market starts gaining momentum you may switch back to the equity fund to enable more aggressive capital appreciation. Similarly, a fund switch can be used in case you are not happy with the performance of your existing funds and wish to move to better performing funds.

Not just market factors but also your life stage/age needs to be considered. If your goals such as child’s higher education, your retirement etc are approaching in the next few years it is best to start switching into conservative funds which are not subject to high volatility and market fluctuations and can thus safeguard your returns.

A fund switch can also be used for asset re-balancing to correct any deviations from your planned asset allocation strategy. For eg: If you had invested Rs 1,00,000/- in equity to debt ratio of 60:40, then Rs 60,000/- would have been invested in equity fund and Rs 40,000/- in the debt fund. After a year, let’s assume your policy fund value is Rs 95,000/- with equity fund at Rs 50,000/- and debt fund at Rs 45,000/-. So now the equity to debt ratio has changed to 52:48. The proportion of the equity fund has reduced and to restore the original 60:40 ratio, Rs 7000/- will have to be switched from the debt fund into the equity fund.

3.       Premium re-direction – This applies only to future premiums and not to existing funds. Like fund switch, premium redirection can also be used to effectively manage the funds. Please also read Difference between Switch of  funds and Premium redirection for more examples on understand how fund switch and premium re-direction can be used to optimize returns.

Fund switch and premium redirection options are to be exercised by the policyholder voluntarily. Most companies allow a few free switches in a policy year after which there is a nominal fee. These options can be exercised by giving a physical request or alternatively you can use the online portal of the insurer. It is much more convenient.

4.       Auto-switch options: The above options if exercised at the right time, can help you maximize the potential of your ULIP. However, this is easier said than done. Even if we have the time and inclination not many of us can boast of having the expertise and market savviness to seize on the right opportunity to switch funds. If you are facing this dilemma, you can opt for the auto-switch options provided by the insurance companies. Most ULIPs have auto-switch strategies where you can opt from a range of investment management strategies as under:

In a life-stage based strategy, the fund manager considers the policyholder’s age and switches from riskier funds to conservative funds as age advances.

In an asset allocation fund, the fund manager considers the market and economic conditions and switches dynamically between debt and equity funds to take advantage of the opportunities presented by each at different times.

In the systematic transfer option, a pre-defined percentage of the funds is switched at specific intervals from the debt fund to an equity fund thereby staggering entry into equity and reducing risk.

Conclusion:

Buying an ULIP is only work half done. Managing it effectively through self-managed options or automatic options will ensure that the objective of return maximization that is envisaged when one purchases an ULIP is met.