Investors with a low-risk appetite wish to invest in avenues or instruments that offer stable returns. In this process, most of them avoid investing in stocks and equities and largely focus on debt-based products that offer stable returns. But ULIPs or Unit Linked Insurance Plans are one option that allows investors with all types of risk appetites to invest in a variety of instruments and earn good returns over the long run.
A ULIP Policy is designed to help the policyholders fulfil their goals through systematic investment, while also providing them with a life insurance cover. So, whether an investor wishes to create a corpus for buying a house or meet retirement expenses, investment in ULIP is a good option.
Some features and benefits of a ULIP plan:
- The five-year lock-in period of a ULIP ensures that the investor is disciplined in managing his finances and makes regular premium payments for wealth creation.
- Investors can decide the sum assured or the maturity amount of their policy based on their financial goals (with some added help from a ULIP plan calculator). The insurance coverage secures the financial future of the policyholder’s family in case of a mishap.
- The policy offers investors different investment avenues with different risk and returns profiles.
- ULIP plans offer investors an option to switch their asset allocation in response to a change in their risk-taking ability or goals or the performance of a fund.
- The policy aims to reward full-time holders with loyalty additions.
Risk-Appetites and ULIP
The ability of an investor to bear risk plays an important role in the investments made. Generally, investors with low risk are cautious of investing in a product that generates returns through the volatile equity markets. They look to invest largely in safe options like debt products. A ULIP policy includes several investment options ranging from only debt or equity products, or a combination of both to cater to the needs of investors with different risk appetites.
- Investment Options for All Investors– While a risk-averse investor can put all his funds in a debt fund, one with a medium-risk appetite can invest in a diversified portfolio comprising both equity and debt products. In the case of a diversified fund, the risk associated with equity investments is balanced via the stability offered by the debt products. Insurance companies offer options to invest in balanced plans or diversified plans that are a mix of equity and debt for the benefit of investors who are not willing to take some risk while expecting stable returns.
- Flexibility to Switch Funds Allocation– Another feature of ULIPs that risk-averse investors can benefit from is the flexibility to switch between funds. This option allows investors to choose safe debt products when the equity markets are down, or they are not willing to take any risk but want to switch to a balanced option when the markets are improving or doing well. Most insurance companies allow multiple free switches during a year, thereby helping investors revise their investments in response to changing situations. Investors can use this option to manage the volatility in the markets. They can invest in equity funds when their risk-taking ability is high and switch to balanced or debt funds when their risk appetite goes down.
- Use the Auto-Investment Mode– Some ULIP plans come with an auto-mode of investment, which is highly useful for investors who are not well-versed in the working of the markets and the factors affecting them. In this case, the fund manager of the ULIP funds handles your investments and switches them between equity and debt or their combinations. This asset allocation strategy allows investors to transfer the responsibility of allocating and investing their funds in different types of instruments.
To conclude, an investor with a low-risk appetite can invest in a ULIP by using its switching feature to change the asset allocation from time to time. Also, since ULIPs are long-term plans, they are highly suitable for creating a good corpus for fulfilling various financial goals. The performance of a ULIP plan is largely driven by the investments made and their efficient management.