Finance & Loans

Know how ULIP helps you mitigate equity market risks

Investment in ULIP allows a policyholder to reap the double benefits of an insurance cover as well as wealth creation. The opportunity to earn returns by investing in a variety of instruments, including equities and debt, is attractive and offers a chance to achieve long-term goals quickly. But the returns from equity investments are linked to the movements in the market and thus, can be deemed risky too.

Here, we talk about how ULIP can help an investor mitigate equity market risks.

Types of ULIP Plans

In India, different types of ULIP plans invest in different types of financial instruments, including equity, debt, bonds, or a combination of them. Investors have an option to choose a ULIP scheme whose investment strategy matches their goals. A risk-averse investor can choose to invest in a scheme that largely invests in debt instruments, while an investor who is willing to take risks and is looking for long-term returns, can invest in a ULIP that is investing in stocks. Before finding ways to mitigate the risks relating to equity investments, we need to know about the different types of ULIP plans available.

Some popular ULIP plans are:

ULIPs Investing in Equities– The investment portion of the premium paid by a policyholder is used to purchase equity shares. Since equity investments are directly linked to the fluctuations in the market, they may carry a lot of risk besides offering high growth potential. So, investors with a high-risk appetite and aiming for high returns should choose this option for their ULIP investment.

ULIPs Investing in Debt– Highly suitable for risk-averse investors, these ULIP plans use the investment portion of the premium for purchasing debt instruments like corporate bonds and government securities that offer a stable return. The returns in this case are moderate but stable.

ULIPs investing in Liquid Funds-These ULIP schemes invest in liquid money market instruments like treasury bills, call money market, and certificates of deposit whose maturity period is less. These plans are highly suitable for investors with a very low-risk appetite.

ULIPs Investing in Balanced Funds– These plans aim to offer investors the benefits of investing in equity markets while balancing the market-related risks by putting some portion of their funds in debt too. Investors looking to diversify the risk associated with equities can choose to invest in these plans.

Life Staged ULIPs-Some ULIP plans make their investments on the assumption that the risk-taking capacity of a person goes down with age. So, these plans initially invest a larger part of the investment premium in equities, with a smaller portion being allocated for debt instruments. However, as the age of the investor increases, the investment mix is changed in favour of debt instruments. This shifts the focus of the investment towards generating stable returns and wealth preservation, as against aiming for higher returns in the beginning.

ULIPs Offering Guaranteed Returns– Highly suitable for investors wanting stable returns, these ULIP schemes aim to preserve the investments via less exposure to market-related risk. This is done by investing only a small portion in equities with the remaining being put in debt instruments.

Ways to Reduce the Market-Related Risk

  • Use Proven Strategies– In addition to choosing the appropriate plan to match your goals and risk-bearing capacity, another way is to use proven investment strategies to allocate funds for investment in different instruments. Investors can identify or choose a strategy that matches their goals and risk profile, and then plan investments. Some popular strategies are: systematic transfer (involves the systematic transfer of the investment in liquid funds to equity), return protector (reducing the risk as the investor gets older by shifting the investment from equity to safer options like debt), and auto fund rebalancing (investor allocates funds between various instruments and reviews the same from time to time).
  • Stay Invested for a Long Time– The benefits of ULIPs also include a chance to invest in market-linked fixed-income securities while saving tax at the same time. Investors looking for a regular income can always switch the corpus to a liquid fund. Similarly, if an investor is looking for long-term returns, staying invested in a ULIP for a long time is advisable. An investment of a longer duration benefits from the balancing of the market fluctuations.
  • Switch Your Investments from Time to Time– ULIP investments also offer investors a chance to switch their asset allocation several times to match their changing goals or risk profile.
  • Go for a Systematic Investment– Choosing a plan with a quarterly or a monthly premium option helps to reduce the volatility risk and average out the investment cost.

To conclude, the market risks associated with ULIP investments can be managed by choosing the plan that matches the investors’ risk profile, adopting an investment strategy that helps investors achieve their goals, and switching the asset allocation from time to time to take advantage of market ups and downs.

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