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Ulips are transparent insurance products that provide a variety of options to manage your returns due to fluctuations in the markets. The fund switch option is one such facility by which you can manage your returns. Fund switching can be carried out based on your risk appetite and how you balance the equity-debt portfolios. Market-savvy investors can use the option to manage their Ulips when the market falls, to optimize the returns. For others who may not have the understanding or time to track the markets, you can leave this decision to the insurer's fund managers by opting for fund options such as asset allocation or wheel of life portfolio options.
Switch To Modify Allocation
The fund switch option is a convenient way for investors to protect their investments from market fluctuations and maximise returns by balancing their investment portfolio between debt and equity. The switching of funds should be done considering your risk appetite, volatility of the stock market and your financial goals. For instance, if you foresee a dip in the stock market, you should switch a large portion of your investment to debt/liquid funds, and switch them back to equity once the market picks up again to leverage the upswing.
Similarly, as your policy moves towards maturity or when you are approaching a milestone in life where finances are required, such as child's education or daughter's marriage, you should move a maximum portion or the required amount of your investment at the appropriate time(s) to debt/liquid funds. This will ensure that a large corpus of the investment is secure and guarantees good returns at the time of maturity or withdrawal.
Depending on the product, Ulips offer a certain number of free switches in a year.
When To Switch ?
This is also a decision that will impact returns. Let's take an example to understand this further. Mr Singh, a 30-year-old earning individual, has invested in a Ulip with a policy term of 30 years. He has opted for an al lequity fund. How should he manage his asset allocation?
Initially, Mr Singh can maintain 100% of his investment in equities. After a few years (say five), as Mr Singh's financial responsibilities increase after marriage and children, he should ideally reduce his investment in equity by 20%. He should similarly reduce equity exposure every five years and move the amount to debt funds. By reviewing the investment every year and continuing to maintain this asset allocation, it is recommended that in the last five years, Mr Singh maintain only 20% of his investment in equity funds.
How To Switch ?
Policyholders can manage their fund switches through the self service facilities offered by life insurers on their customer portals. Check with your insurer if they have secure translation process for changing the asset allocation on your Ulips. This is basically to protect the customer's interest and minimise misuse of the system.
'Automatic' Switching
If you are not market-savvy or do not have the time to keep a watch on the market, you can opt for the asset allocation fund or "wheel of life" portfolio strategy offered by some Ulips. In an asset allocation fund, the insurer's fund manager switches between equity and debt funds considering the view of the market.
In the 'wheel of life' strategy, the investment is managed in a pre-defined manner with automatic switches. By opting for the 'wheel of life' portfolio strategy, the investor puts his asset allocation on an "auto" mode wherein the investment is gradually exposed to debt from equity keeping the investor's age and outstanding term in mind. This optimises risk and returns based on the time horizon of the plan.
Studies have shown that if the asset mix is changed frequently depending on market conditions, investors can insulate themselves from the market volatility to a certain extent. Investors with a dynamic asset allocation that changes with the market level have been able to secure returns of 8-9% versus an aggressive or balanced investor. So, go ahead and use your fund switch option to get better returns or leave it to the expert fund manager.
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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.
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Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
- HDFC TaxSaver
- ICICI Prudential Tax Plan
- DSP BlackRock Tax Saver Fund
- Birla Sun Life Tax Relief '96
- Reliance Tax Saver (ELSS) Fund
- IDFC Tax Advantage (ELSS) Fund
- SBI Magnum Tax Gain Scheme 1993
- Sundaram Tax Saver
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