When you pay the premium for ULIP (Unit Linked Insurance Plan), the insurance company invests a specific portion of the amount in different money market instruments like stocks, government bonds, hybrid funds, equity funds, debt funds and more.
The investment aspect of ULIP is managed by a professional fund manager who makes the investment decisions on your behalf. However, you can define the percentage of the funds to be invested in high-risk and low-risk options based on your risk-taking capacity and financial goal. You can define the percentage of the fund allocation at the time of buying the policy.
Over the years, as you continue to invest in ULIP, your financial goals and risk-taking ability may change. This is where the fund switching feature in ULIP plays an important role. It is one of the most significant ULIP benefits. This option allows you to switch your investment from one fund to another. For example, if you initially invested a large portion of the funds in debt funds, then you can switch it to equity funds or stocks that have high returns potential or vice-versa.
Let us know more about the benefits of the ULIP fund switching feature-
- Manage investments according to risk appetite
The risk appetite varies from person to person, and it can be different at different stages of life. If you have just started your career, then you can take an aggressive investment approach, i.e., take high risk, and allocate the majority of the funds in equity funds or stocks. This gives you better chances of getting high returns. Also, if something goes haywire, then you have plenty of time ahead to recover the losses.
In contrast, if you are nearing retirement, then you may want to invest in low-risk funds and get steady returns. In such a scenario, you can invest the majority of the funds in debt, hybrid funds, or government bonds.
The ULIP fund switch feature enables you to switch your investment from equity to debt and vice versa.
- Protect your investments from market fluctuations and minimise losses
As an investor, you would want to adjust your portfolio from time to time as per the changing marketing condition. For example, if you foresee that the market will go down in the near future, then you can switch your investments in equity-related funds to debt or liquid funds to protect your capital and minimise the losses. Later, you can switch back to equity funds when the market peaks. Thus, the switch fund option in ULIP helps you get maximum returns.
- Adjusting the portfolio to suit your long-term goals
Another significant benefit of the switch fund option in ULIP is that it helps you align your portfolio as per your changing financial goals. For example, if you are a young investor and want to build a corpus for post-retirement needs, then you can take more risks with your investment and invest heavily in equity funds. As you near the retirement age, you can switch the investment to debt funds to get steady returns and protect the capital.
- Tax benefit
Apart from helping you build a corpus for the future and protecting your family’s financial future, ULIPs also help you get tax benefits every year. The premium you pay for the policy is eligible for tax deduction from your annual tax liability by up to Rs. 1.5 lakh in a financial year. Also, the funds your family receives in the event of your demise are entirely tax-exempt.
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While the fund switch option in ULIP is highly beneficial, you must be careful about exercising the option. If done smartly, then it can help you get valuable returns in the long run, and by the time your policy matures, you will have a sizeable corpus.