As ULIPs are becoming common among investors, more people are learning about the benefits that they can enjoy with this product. ULIP is a great financial instrument if you are looking to invest and get life cover in the same policy. It helps in growing your wealth for matching your life goals. However, there are two types of funds: equity and debt. It is well known that the equity market is a high-risked market. But investments in ULIPs are not limited to just equity. Read on to understand more about investing in this product.
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What is ULIP?
A unit linked insurance plan is a type of life insurance policy which allows the policyholder to invest in market-linked funds. However, the policyholder can enjoy the benefit of life insurance cover in the same policy. This helps their loved ones to face life risks. When you invest in this policy, you get to invest in equity and debt funds. Both funds provide different advantages and returns to the investor. It is always advised to stay invested in ULIPs for the long term and reap greater benefits.
What is equity fund?
One of the types of funds that you get to invest in ULIPs is the equity fund. In an equity fund, investments are made in stocks of companies that listed on the market. Based on the market value of the company, you could be offered small-cap, mid-cap or large-cap stocks. Equity market has a high-risk factor too. This is mainly due to the fluctuations that impact the value of the stock of the company.
Investors who usually opt for equity markets are people with a huge funding that can easily cover their losses. However, investing in the equity market can provide higher returns.
What is a debt fund?
The other fund that you get to invest in ULIPs is the debt fund. In debt fund, investments are made in government securities, bonds, and corporate bonds. Debt has a low risk factor due to the nature of its investment and lower exposure of risk towards investment. Investors who invest in debt funds are those who are looking for a steady income in the long run.
There is also the cash market that is a part of debt fund. Here, the investments are done in bank deposits, cash market, and liquid funds. Compared to other investment options, these markets have a lower risk factor, but they provide lower returns as well.
Which fund is better?
As mentioned above, equity funds offer better returns than debt funds. However, the risk factor could impact your returns. For example, Ricky is looking to invest in ULIPs in order to save money for a business he wishes to start. In the beginning, Ricky had a higher risk of appetite, so he invested almost all his money in equity funds. It gave him good returns for certain period. However, after some time, the market was going through a bad phase. This impacted Ricky’s returns and investments heavily. Although he did not lose all his money, he became very cautious about the risks of equity funds. So, he started investing a small amount in debt funds as well. As Ricky had a long-term policy, he was able to regain his returns after some point of time.
Similarly, as an investor, you should engage in fund switching from time to time, to get good returns on your investments without too much exposure to market risks.
Which fund should you go for?
Based on the example given above, every investor of a ULIP should opt for balanced funds. This means that the investment is made in both equity and debt fund. This ensures balanced returns to you as an investor. It also helps you in riding out the risks while getting steady returns on your investments. Take advantage of fund switching to maximise your profits. This will help you in accomplishing your life goals as well.
You should never totally rely solely on equity funds when you invest in ULIPs. Investing in both funds not only keeps your returns consistent, but it also ensures that your maturity benefit increases for a secure future. You can use the ULIP calculator on your insurer’s website to know more about which fund would benefit you more.