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How to get Better Returns from Unit linked insurance plans or ULIPs ?

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Unit-linked insurance plans or ULIPs, as they are popularly known, offer not only a professionally-managed investment-cum protection platform but also provide an entry point into the equity markets. Apart from equities, investments in highest-rated debt instruments also make Ulips a perfect choice for investors looking for a long-term investment instrument that offers transparency and flexibility.


Ulips offer a range of fund options with different asset allocations to meet the requirements of policyholders with different risk appetite. By spreading investment across different asset classes, investors can create a diversified portfolio where the loss on a certain asset class can be compensated by the profits made on another. Thus, you reduce the overall risk of your investments. Keeping this in mind, unit-linked insurance plans by insurance companies offer policyholders the option of free switches between funds, so that they can effectively manage their portfolio asset allocation. Using switches, the policyholders can move their investments between various asset classes like cash, debt and equity, depending on their risk appetite and financial goals. Policyholders can make appropriate asset allocation decisions to lower risk or improve returns by spreading the investment across a variety of asset classes that behave differently during different market cycles. Policyholders can benefit from switching strategies as appropriate switches can take advantage of the movement in asset prices resulting from changing financial and economic conditions.


To build a well diversified portfolio, it is important that the policyholder has an exposure to all asset classes – equity, debt and cash. The two key questions that policyholders always face include: (i) which asset should he own and (ii) how much of each asset must he own. The policyholder's fund switching decision will depend on the answers to these two questions.


Which and how much of each asset one must own is a function of one's risk tolerance as well as ones perception on how each asset class will perform. Each asset has varying risk-return characteristics – equity having the highest risk and also the highest returns, and cash having the lowest risk and lowest returns over the long term. On the other hand, investment in debt gives your portfolio the certainty of returns and lessens the risks of erosion of the principal invested. The risk appetite that the policyholder has will vary depending on which stage of his life cycle he is in and he needs to balance this with his return aspirations. Policyholders tend to get more risk averse as their financial obligations increase as they get older. They should, intuitively, switch from more risky equity funds to less risky cash and debt funds as they get older. At Birla Sun Life Insurance, we offer policyholders a life cycle option which is an automatic switching strategy depending on their age and risk profile. The assets of individual policyholder are reallocated amongst equity, debt and cash assets in a proportion based on the individual's age and risk profile. This ensures that the level of risk that an individual is exposed to is optimised and his returns protected. One's perception of how various asset classes will perform in different economic scenarios could also influence ones switching decision. For example, if equity markets look significantly overvalued and expensive, policyholders may switch out of the equity funds only to switch back when equity markets correct substantially. Many insurance funds offer trigger options that allow for automatic switching based on the behavior of the underlying assets in the fund.


The appropriate and timely use of the free fund switching options from insurance companies helps policyholders optimise on their asset allocation, minimise risk and maximise returns.

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