Financial PlanULIP

3 Different Types of ULIP Funds for Your Investment Portfolio

Everyone strives to achieve financial stability and long-term financial goals. While one may want to retire early, somebody else may want to buy a house; personal goals may vary and turning them into reality is possible through various means. There are a number of investment options to choose from. Based on the personal financial goals, investors can make the right decision, which helps increase wealth and fulfill goals.

What is a ULIP?

Unit-Linked Insurance Plan (ULIP) is a market-linked insurance plan that is ideal for meeting long-term financial goals. With multiple features, it makes an ideal investment option. There are various features in a ULIP, which include multiple fund options, a choice of premium payment, partial withdrawals, and ease of switching from one fund to another. ULIPs have a lock-in period, at the end of which, you can make tax-free partial withdrawals. You can also switch from one fund to another and there will be no tax implication on the same. Based on your ability to pay the premium, you can choose from a single premium or a limited premium term. The amount you invest in the ULIP will be divided into two purposes-one will go towards the insurance plan and another part of the amount will be invested into a fund. If you choose a limited premium term, you will have to make the payment of premium for a particular period only and the policy will have a longer tenure. ULIP investment is associated with the market movement. The Net Asset Value (NAV) is the total value of the asset holdings minus the expenses. It represents the value of the total holdings of the ULIP. Hence, the ULIP NAV will vary according to the vicissitudes of the market. The number of units you can purchase depends on the NAV of the fund on the day of investment.

Types of ULIP funds

You can choose from numerous ULIP funds. However, you need to consider your ability to pay the premium on time and choose the fund that is best suitable for you.

  1. Growth Funds

Growth Fund and Growth Super Fund are the type of ULIPs, which focus on equity markets and have about 70% of the amount invested in equities at all times. The balance 30% is invested into debt instruments across the money market, government, and corporate sectors. The risk associated with growth fund is high because of the concentration on the equity market. The market movement will have an impact on the value of the fund. They are also known to offer highest rewards. There are high risk and high rewards associated with growth funds.

  1. Balanced Funds

Balanced funds invest in debt instruments like government securities, money market papers, and corporate bonds that are issued by the State Government and the Central Government. They also invest a small amount in corporate bonds. The equity exposure remains low ranging from 10% to 40%. The funds carry low risk and low rewards. Since the investment is concentrated on fixed income securities, the reward will be average.

  1. Conservative Funds

Conservative funds invest primarily in debt instruments like government securities, money market papers, and corporate bonds issued by the government. The exposure to equity remains up to 15%. These have the lowest risk and low rewards. The returns from government securities and corporate bonds will be fixed. Since the exposure to equity remains minimal, the returns will mainly consist of the interest on fixed income bonds. These are ideal for those who have no risk appetite and are only investing to generate fixed income.

Invest in a ULIP plan as per your suitability

You need to choose the best ULIP plan based on your financial requirements. If you have recently started working and have no major responsibilities or outstanding loans to pay, you can opt for growth funds. The funds have a high return and heavily invest in equity. You can make the most of the market volatility if you remain invested for a long period. However, it is not advisable to switch the fund repeatedly. You cannot time the market, and any movement in the market will have an impact on your portfolio, but that does not mean that you switch the fund frequently. For example, if you have a regular monthly income, and are investing for the purpose of fulfilling a goal such as children’s education or purchasing a home, you can opt for balanced funds. It will maintain a strong balance between debt and equity instruments. Thus, the risk associated with the investment will be low and you will be able to benefit from the market movement. If the market falls, you do not have much to lose, since you have concentrated on the debt instruments. It will help you achieve your long-term financial goals without carrying much risk. Lastly, if you are on the verge of retirement and looking for fixed income from your investment, you can choose conservative funds. It carries the lowest risk and has a regular income from the investment. The fund invests a minimum amount in the equity. Hence, the market movement will not affect your returns.

The key to generating high returns, in the long run, is by choosing the right fund and by remaining invested for a long duration. ULIPs performance has shown substantial results in the last ten years and is a preferred investment option for many. With multiple features and tax benefits, it is an ideal investment product for investors of all age.

Vikas Agarwal
the authorVikas Agarwal
Vikas Agarwal is an IIT-Varanasi graduate in Chemical Engineering. He is the Founder and CEO of Finaacle.com - an investment advisory website. He is a Business Development Professional but a Value Investor at heart. He writes articles on Finaacle, which focus on simplifying the art of investing and the causes of human misjudgment when it comes to investing. He also shares his experiences as an investor and lessons from some of the greatest investors of all time.

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