The fundamental goal of investing is to earn good returns at the most minimal risk. An ideal avenue to achieve this objective is through a Unit Linked Insurance Plan (ULIP). Such a plan offers the dual advantage of life coverage as well as investment. The fund manager uses part of the premium amount to invest in various investment vehicles, such as bonds or stocks. The remainder is used to cover risk. Your nominee will receive the sum assured amount as per terms and conditions of the policy, in case of an unfortunate death within the policy period.
The number of ULIP benefits offered has indeed made it a popular investment option. A ULIP policy offers tax advantages under Section 80C of the Income Tax Act, 1961. You may also withdraw a portion of your investment in times of financial emergencies. This scheme also aids in your goal of long-term wealth creation, and may be used for various purposes, such as funding your child’s higher education or purchasing the home of your dreams.
What is a ULIP ‘fund switching’ option?
The most attractive feature of a ULIP plan is its flexibility. It gives you the freedom to choose between various investment options like debt, equity, balanced funds, cash funds, bond funds, and fixed interest funds. You may switch between these options based on the prevailing market conditions, your budget, and investment goals. This feature of moving funds between investment options is known as ‘fund switching’.
You may understand this concept better through a simple example. If you have currently invested in debt funds and the debt market is not conducive for growth, you may use the fund switching option and transfer your funds to a well-performing investment avenue, say equity funds. Alternatively, if you wish to generate a steady flow of income without having to bear much risk, you may consider switching from equity funds to debt funds.
An important aspect to keep in mind is tracking the fund performance. It is imperative to do your due diligence before exercising this option. You may analyze the performance of different instruments and then make a well-informed decision. A wise way to do this is by referring to the funds’ Net Asset Value (NAV), which is generally declared by the insurer from time to time.
Benefits of ULIP fund switching option
The primary objective of a ULIP plan switch option is to gain a leverage from well-performing funds. In case a few of the investments in your portfolio are performing lower than the others or are not yielding any profits, you may exercise the fund switch option to earn higher profits. You may transfer units either partially or totally into varied fund options based on the market performance. This feature, therefore, shields your investment against the volatility of the stock market. You may optimize your earnings during the highs and lows of the stock market simply by using this facility.
However, it is not only market conditions that affect your decisions to make the switch. Two other factors that play a crucial role are your age and risk tolerance. For example, Mr. Shah, a 30-year old unmarried working professional, has opted for an all-equity fund. Since he is young and does not have much liability, his risk tolerance is higher. However, after a few years, his financial responsibilities may increase due to marriage and children. In such a situation, Mr. Shah may consider moving to a less-risky investment option such as debt funds. This will ensure that his investments are safe and he may fulfil his financial obligations easily.
Cost of ULIP fund switching
Some insurance companies provide the benefit of unlimited switch options, while some have a cap of5 to 10 free switches. If you exceed this limit, a nominal charge of INR 50 to INR 500 is levied per switch. Some insurers even offer the benefit of permanent fund switch options. Bajaj Allianz Life, for example, provides this benefit. To avail of this, you may simply use the Fund Apportionment option in the service menu and permanently change the fund apportionment according to your latest fund switch.
Process of switching funds
The process of exercising this option is fairly simple. You may opt for either of the following methods to execute the switch fund request.
- Through the insurance provider’s website
You may manage fund switches by accessing the insurer’s online portal. You may register by creating a user name and a password. You may then enter the percentage of funds to transfer from the previous fund option to the new fund. The insurer will then process your request.
You may also opt for the automatic switch option to switch between your funds without having to do it manually. This option is beneficial if you are not market-savvy or do not have much free time to keep tabs on the stock market. In the auto mode, your investment is gradually moved from equity to debt keeping in mind your age and time horizon. You may, therefore, enjoy optimal returns given your risk tolerance and outstanding term.
- Paper form submission
A traditional way to switch funds is to submit a duly-filled physical endorsement form at your local branch. By providing details about the amount to be transferred, your existing fund plan, and the chosen new fund option, your insurance provider will successfully make the switch.
By exercising the ULIP switch option wisely, you may insulate yourself from market volatility and obtain good returns on your investment. You may calculate these returns by using a ULIP calculator a well.
