Unit Linked Investment Plan (ULIP) is a must-have financial product in your portfolio. It is a merger of insurance and investment. It provides you with life insurance, so your loved ones are financially secure in your absence. The premium that you pay towards your ULIP is partly used towards your insurance and is partly invested in the fund you choose. It is a great investment tool as it provides good returns on your investments and the returns are also tax-free.
There are several types of ULIPs to choose from. Ensure that the one you choose allows you to switch amongst different funds to benefit the most from market volatility. Based on your risk appetite, there are three types of ULIPs – equity, debt, and balanced. To get the best returns on your ULIP, it is important to monitor the market. Apart from tracking the market fluctuations, here are some tips that can help you get maximum returns from your ULIP policy –
Selecting the type of funds
Equity-based ULIPs and debt-based ULlPs, both have their own set of pros and cons. When you opt from an equity fund, the company puts your money in the equity market. Here, the risk involved is high, but these usually give high ULIP returns, too. Debt funds are a safe place to invest your money in. Debt funds invest in government or corporate bonds. These investments are safe but also offer low returns. Also, companies offer balanced funds that have both equity and debt funds to strike a middle ground. Many people who are afraid to invest in equity directly prefer equity based ULIPs. A ULIP does not directly deal with the market tension and also, they can switch to debt funds whenever they want.
Align your ULIP with your long-term goals
When you are choosing your premiums and tenure for your ULIP plan, ensure that they align with your long-term goals, be it buying an apartment, building a retirement corpus, or your child’s education. Also, depending on the goal and your dependency on the funds from ULIP for that goal, you can determine the risk that you should take. Many individuals prefer to invest in equities in their initial years and if they think that they will need the money soon in later years, they switch to debt funds. This ensures that they don’t completely miss the high returns of equity but also have their funds safe when needed.
Use the power of compounding
A ULIP has a minimum lock-in period of five years. It is one of the best long-term investments to hold as you will have life insurance for many years and receive returns too. For example, if you buy a plan for 15 years, the ULIP returns you receive over those years will be compounded. As you keep investing, the amount that you invest is added to the principal amount year after year. This compounding effect enables you to multiply your principal amount over the years. If you want to create long-term wealth, it is advisable to invest in your ULIP for a minimum of ten years.
Take the advantage of asset allocation
You can switch between different ULIPs to maximize your returns. It is essential to manage your portfolio’s asset allocation and diversify it to seek maximum benefits. Diversifying your assets will reduce the overall risk of your investment. If there is one risky asset class, ensure that there is one safe class too, balancing it and creating great returns at the same time. When people invest in a single asset, there are chances of losses being incurred or getting bare minimum returns. Based on your risk appetite, you can switch between different asset classes, like equity and debt.
Ensure timely payments
When you are paying premiums on your ULIP, you are automatically inculcating a habit of saving. When you choose a ULIP plan, ensure that you choose a premium that you will pay with ease until the plan’s maturity. The company also allows partial withdrawals after five years. When you are regular with your payments, there are insurance companies that offer loyalty benefits too. These benefits usually include a waiver of some charges that you pay when you buy a ULIP. Also, regular payments ensure that your policy continues with no hassle and you have a life cover secured.
With ULIP, you have insurance and a policy at the same time. The premiums you pay for your ULIP and the sum assured, both are exempt from taxes. Also, the flexibility of a ULIP policy makes it a significant investment to benefit from market fluctuations. Take into consideration the tips mentioned above to reap maximum benefits.