When we invest and build our portfolio, we are often wary about market instruments that are prone to fluctuations. The high returns do sound lucrative, but the thought of losing money makes us avoid equity markets altogether. Also, most people in the country do not earn enough to have excess funds with which they can take the risk. So, instead of high-risk markets, individuals often look for funds that have low risk. Traditional instruments, like fixed deposits (FDs) and recurring deposits (FDs), were the most popular. However, after researching and gaining knowledge about other financial instruments, several individuals found low-risk investments in the market that offer better returns than traditional financial products, such as a Unit Linked Insurance Plan (ULIP).
ULIP is a combination of two financial components: insurance and investment. When you buy a ULIP, you are required to pay premiums. Like any other insurance, however, the premiums you pay are partly utilized to provide you with a life cover and partly towards allocating funds for investments. They secure your life with coverage and also prooffertractive returns through market-linked funds. One can quickly maximize gains on ULIP by investing for the long haul.
The insurance company from where you purchase a ULIP specifies beforehand the sum assured that would be payable to the nominee if you as a policyholder lose your life within the tenure of the plan. This sum assured is fixed, and market fluctuations do not influence it. When you survive your ULIP plan, you will receive a maturity sum at the end of the plan. This sum comprises the investment you made and the returns you earned on it. If you are investing in ULIP with an end goal in mind, use a ULIP plan calculator to estimate the amount you will receive post-maturity.
ULIPs vs. low-risk investments
Offers funds to choose from, based on risk-appetite
When you buy a ULIP policy, you can choose to allocate your funds based on your risk appetite. If you take risks, you can invest in equity funds as they offer high returns but are risky. This money is invested into equity markets. If you want low-risk investments, you can choose to allocate your money to debt funds. Debt funds usually include corporate and government bonds. If you’re going to take risks but are afraid of placing all your money in equity, you can choose a balanced fund instead. A part of your money is invested in equity in balanced funds, and a part is invested in debt. These funds offer moderate returns and have reasonable risks involved.
Allows you to switch your allocation
ULIPs are subjected to market fluctuations. The ability to switch between funds of your choice is a feature of a ULIP that enables one to make the most of market fluctuations. You can switch between debt funds and equity funds, and vice versa, anytime you want. People can change their allocation according to the market volatility and maximize gains on ULIP. Several investors also prefer to invest in equity in the initial years, and once they have earned enough returns, they switch their allocation to debt funds.
Higher returns than low-risk investments
Investing in equity markets through ULIPs is less risky than directly trading in the market. ULIPs have fund managers who manage your funds efficiently and create a diversified portfolio. Compared to low-risk investments, you find that ULIPs offer huge returns. If you are invested in ULIP for the long haul, you all benefit from compounding. Use a ULIP plan calculator to plan according to your financial goals. Also, you have the freedom to switch your allocation based on your risk appetite any time you want.
When you invest your money in low-risk investments, the returns you earn in most of them are taxable. Whereas the maturity amount you receive after your ULIP matures is exempt from taxes. Also, unlike most investments where your money is blocked for a fixed period, ULIP allows partial withdrawals after the lock-in period.