Unit Linked Insurance Plans or ULIPs are a popular hybrid financial instrument that offers insurance and investment in one. Hence, ULIPs are regarded as a versatile product and also known as insurance-cum-investment plans. Just like any insurance plan, ULIP also requires periodic payment of premium to keep the coverage active. However, the entire premium is divided into two parts — one, towards investment in market linked securities and second, towards providing life insurance coverage. In the event of an unfortunate demise or disability, the nominees are paid a specified sum assured or the fund value depending on the type of plan. But if the policyholder outlives the policy tenure, the investments are paid to the policyholder at its then value.
Since a part of the premiums are invested in markets, the investments assume a higher risk, but offer higher returns. There are several funds in which these investments are made. This article elaborates on some of the different funds that you can consider based on your risk appetite.
- Equity-based funds
Equity-based funds are those investments where the premiums are invested in the equity shares of one or more companies. These equity investments are considerably risky since they are directly linked to the fluctuations in the financial markets. But the potential for growth in these kinds of funds is the highest. Any change in the financial markets is directly reflected in the fund value and thus, is ideal for those investors that have a high-risk appetite. Anyone who is a risk-averse individual can consider other safer alternatives than equity-based funds.
- Debt-based funds
Debt-based funds are those ULIP funds where investment is made in debt securities. Debentures, corporate bonds, government bonds, and securities and fixed income bonds are examples of debt funds. Since these investments are not directly linked to the financial markets, they carry a medium level of risk. At the same time, they only offer moderate returns unlike equity funds.
- Liquid funds
A liquid ULIP fund is perfect to meet short-term financial goals as the fund managers park the investment in highly liquid instruments that can be easily converted to cash within a short time. Treasury bills (T-bills), call money, certificate of deposits are some examples of liquid instruments where investment is made. Liquid funds, unlike other types of funds, have shorter maturity, which ranges from a few days to months, and also have strong credit ratings, making them a safer investment for investors with lower risk appetite.
- Balanced funds
ULIP investments in balanced funds are where the mixture of equity and debt instruments are used, hedging the risk of equity instruments and seeking somewhat guaranteed returns by way of debt investment. The entire risk on the investment is thus spread over the different forms of investments. The returns in this case are also stable and far less volatile than only equity-based funds.
- Cash funds
ULIP investments can also be made in very-low risk cash fund instruments like term deposits, cash deposits, and market funds. They offer one of the lowest returns among all the above alternatives in which the risk is also negligible. For investors who want to eliminate the maximum potential risk, this is a nifty alternative.
While the above are the funds that are available when buying ULIPs, you can also choose the right type of fund using a ULIP calculator. It is a free tool available on most life insurance company’s websites to help calculate the premium and estimate returns based on historical data. Further, a ULIP calculator can also compare different ULIP plans to decide on which policy checks all the right boxes for you.
While there are several ULIPs to choose from, they can not only be classified based on the type of funds that they invest in, but also based on their wealth creation capacity. Single premium and regular premium ULIPs are one such type of ULIP. Further, as a policyholder’s age increases, their risk-taking capabilities decline and for that, life-staged ULIPs can be classified. Lastly, ULIPs can also be categorised into guaranteed and non-guaranteed, where the objective revolves around capital preservation by adopting to different levels of market exposure.
Finally, selecting the right ULIP requires you to know how much risk you can assume and what are your life goals, followed by choosing a suitable policy.