WITH stock market movements making the headlines yet again, it is time for many anxious investors, especially retail investors, to take stock of their holdings, equities as well as mutual funds. While they are understandably concerned about their investment portfolio, they often do not attach equal importance to monitoring their Ulips (unit-linked insurance plans) funds. This, despite the fact that Ulips initiate most investors into the world of equities. In fact, a large number of policyholders consciously choose pure equity fund Ulips even though other asset classes are up for grabs. Given the popularity of these insurance-cum-investment products and, particularly, the equity fund option, there is every chance that more of your money could be sitting in a Ulip equity fund than in stocks or equity mutual funds. This makes it all the more important to keep a tab on your Ulip holdings.
Lacklustre Response:
Life insurance companies offer several fund options in Ulips which invest in equities, debt (or income) instruments or a mix of both. The option to switch is not used very frequently, but some use it actively. For most clients, it is hard to remember to initiate a switch. Another factor may be that they are not aware that they can rebalance their investment portfolio by switching.
On an average, we receive approximately 500 requests per day for fund switching, which goes to say that not many customers opt for this option.
All About Switches:
Switching allows the policyholder to transfer units fully or partially between fund options available. The switch option is typically used by people for two reasons.
Ø The first being to optimise opportunities and play safe during market fluctuations and
Ø The other being to reduce risk by shifting to debt options as maturity draws closer.
Fund options encompass various permutations and combinations in equity and debt avenues. Typically, these will be pure equity, debt and balanced — which may be named say 'growth', 'secure' and 'stable'. Then, there are other variants, called auto asset allocation or auto re-balancing, where the insurer's fund manager takes on a more active role This could be by way of ensuring that the pre-decided asset allocation is maintained or the corpus is redirected to safer avenues in a staggered fashion as the insured's milestone approaches. It helps policyholders transfer the responsibility of minutely monitoring their portfolio regularly to the fund manager.
Certain number of switches — which could vary from four to 12 in a policy year, depending on the company and the product — are offered free of charge. Once you have exhausted this free limit, you may have to shell out charges in the range of 100-500 per switch, again subject to the company's charge structure. Some companies, though, have eliminated this cap on free switches altogether in the policies launched after September 1, 2010, enabling policyholders to make as many switches as they wish during a policy year.
Making The Switch:
By exercising this option, you can protect your investments from market flip-flops. For instance, if you foresee a dip in the stock market, you should switch a large portion of your investment to debt funds, and switch them back into equity once the market picks up again to leverage the upswing.
However, market conditions alone need not be the basis for taking this call. For a retail investor, anticipating the ups or downs in the market is not a cakewalk. Besides, even celebrated stock experts fail to predict accurately on a regular basis. Therefore, your risk appetite, age, financial goals and needs of your dependents are the other factors that deserve a say in the final decision. As your policy moves towards maturity or you are approaching a milestone in life where finances are required such as child's education or marriage, you should move a maximum portion or the required amount at the appropriate time(s) of your investment into debt. This will ensure that a large corpus of the investment is secure and guarantees good returns at the time of maturity or a withdrawal.
Switching is always a difficult call. The major driver should be — 'is the money needed for a fixed monetary obligation or a real (inflation-related) obligation'. Easier said than done — a child's education in 10 years' time is definitely inflation-related, but when it is a year away, it is fixed in monetary terms. Timing the market (switching from equity to bonds/cash) is very difficult, so when you get close to the time for switching assets, it is best to do it in a phased manner – unless you think you are really good at reading the market. In other words, three switches can be staggered over six months (now, three months hence and six months later), rather than betting on getting the timing right and doing it all with one switch.
This apart, some insurance companies provide investment options — where the switches take place in line with one's goals — that are promoted heavily. But that may not necessarily be the ideal approach for everyone. "The life stage approach is widely discussed, but is to my mind over-rated. If a person has built a nest-egg to take care of retirement, it makes sense to retain a balanced portfolio of assets even after retirement, as the need for inflation protection/real growth in as-sets continues. Buying an annuity does protect against living too long, but it does not protect against uncertain levels of protection in future (and it is not at all-tax efficient)," reckons Cartwright.
The key point to be noted is that your Ulip fund – especially equity fund option – needs to be treated much like the rest of your investment portfolio. The rules re-main pretty much the same. For best results, do not give in to the temptation of dancing to the tunes of stock market fluctuations alone. Stay invested with a long-term horizon in mind. In the interim, though, if you spot a really lucrative opportunity to book huge gains, make the switch and lock the same into the safer debt option. Also, be focused on shielding your investments from possible volatility by redirecting the equity component into income funds as you move closer to your financial goal.
Use the switch mode to play safe during market fluctuations. You can also cut risks by moving to the debt option if your fund is nearing maturity
Though most investors religiously track their mutual fund and stock portfolios, they tend to take their Ulip investments for granted While life insurance companies offer the option of switching between various Ulip funds, a majority of policyholders seldom use the facility You should not base your decision on switching between funds on market conditions alone. Always keep your risk profile, age and needs of your dependents in focus If you plan to make a partial withdrawal in the near future, you can transfer part of the corpus into an income fund to insulate it from fluctuations in the interim
Senior citizens tricked into buying Ulips can consider exiting when the market goes up to benefit from the inflated fund value 4 to 12
Number of switches you are allowed free of charge, depending on the mutual fund and the product (some even offer unlimited free switches) 100-500 Charges that you have to pay after you exhaust the free switches
