When you are looking for investments, a Unit Linked Investment Plan (ULIP) is one that you should add to your portfolio. It fulfils your two financial needs in a single plan, providing life insurance and an opportunity for investment. Similar to any other life insurance, you are required to pay a premium. However, it is allocated differently than traditional life insurance. The premiums of your ULIP are partly allocated towards life insurance and partly allocated towards life insurance. These dual benefits make it the perfect product to add to every investor’s portfolio.
Insurance companies provide several types of funds you can choose from for your ULIP. The different funds available can be broadly divided into three types based on your risk appetite. The three types are equity, debt, and balanced. Once you understand what ULIP is as a policy, you need to decide how you want to go about investing in it. Here are four key strategies you can use while buying a ULIP:
Your fund selection depends upon your risk appetite and financial goals. If you will take risks, you can invest in the equity markets through equity-based ULIPs. Whereas, if you are looking for investment opportunities that are low risk, you can simply choose debt funds. If you are looking for a financial instrument that provides a balance between both options, you can choose balanced funds. They comprise both equity funds and debt funds. They provide moderate returns and have moderate risks involved. To maximise your ULIP benefits, it is important that you choose the funds that meet your needs. Evaluate your risk appetite and your current portfolio to know the type of funds you need to add to your portfolio. You can use a ULIP calculator and choose the premium amount based on the sum assured you want when your policy matures.
Multiply returns with compounding
ULIP is a policy that has a lock-in period of five years. It is designed for the long haul and to reap its maximum benefits; it is important that you stay invested until your plan matures. A part of the recurring premiums you pay is added to your current investment. With recurring investments added, your ULIP benefits increase because of compounding. Compounding is when you earn interest on your previous returns along with the principal amount, too. Your returns are multiplied with compounding, which allows you to maximise your benefits
Alignment with your long-term goal
It is important that the investment component of your plan aligns with your long-term goals. It is essential that when you are choosing the amount of your premium and the tenure of your investment; you keep your goal in mind. Be it investing in your child’s education, buying your dream house, or simply investing for your retirement, whatever your goal may be, it is important to keep it in mind before investing. Also, take your other investments into account, as they will give you a fair idea of what you want from your ULIP. If your portfolio is already filled with risky investments, you can choose safe investment options in your ULIP or vice versa.
Take the advantage of asset allocation
One of the unique ULIP benefits is that you can switch your fund allocation anytime you want. Since they are market-based investments, their performance is directly based on market fluctuations. In order to maximise your returns, you can simply switch your allocation from debt to equity and vice versa anytime you want. Asset allocation and switching between funds allow you to diversify your portfolio and seek maximum profit. Ensure that you research and compare different funds before allocating them.
ULIP offers life insurance and investment opportunities in a single plan. When you buy a ULIP, you get several tax benefits as the premiums you pay are subject to deductions under Section 80C. When you are choosing the fund, ensure that you take the above strategies into consideration. These strategies will allow you to maximise your ULIP benefits as an investment. It will help you create a comprehensive portfolio where your risk and reward ratios are balanced.