A Unit Linked Insurance Plan (ULIP) is a type of life insurance that also provides investment rewards along with insurance cover. That is a core ULIP benefit. In a ULIP plan insurance, companies allocate a portion of the premium for life insurance and invest the remainder in other assets such as stocks or bonds. Unit linked insurance plans have grown in popularity because of their flexibility in switching funds, inherent advantages like tax benefits, insurance coverage, and cheaper administration fees than mutual funds.
ULIPs are excellent for achieving long-term wealth growth and insurance goals. ULIPs, similar to mutual funds, are market-linked plans that need to be modified to optimise profits in a volatile market. Because ULIP lock-in period is of 5 years, it’s better to stick with them for a few years to reap the most benefits. At the same time, regular fund monitoring is necessary to achieve maximum long-term returns.
How to track the performance of your ULIP policy?
To determine the returns on a ULIP investment, you must consider the premium and the duration for which the premium is paid. To determine absolute return, also known as point-to-point return, investors must compare the scheme’s original NAV with its present NAV. The steps to calculating absolute return are as follows.
1. Subtract the starting NAV from the current NAV
2. Subtract the value from the original NAV
3. To achieve a % value, multiply the amount obtained in step 2 by 100
Absolute return reflects a ULIP’s success in the near term. Because investments are based on compounded returns, absolute return may not provide a realistic picture of long-term results.
A compound annual growth rate (CAGR) represents a yearly increase of an investment over time. To determine the CAGR for a ULIP, a policyholder can utilise the scheme’s initial and ending values, as well as the number of years. CAGR, on the other hand, does not take volatility in returns into account over time. As a result, in the absence of market volatility and other factors, CAGR cannot be used to predict ULIP investment growth in the following years.
Below are some of the techniques that you as an investor could use to reduce risks and protect your assets.
- Select suitable funds
Aligning funds with long-term goals and requirements can help to decrease risk while increasing returns. The selection of funds is critical to suit individual demands and risk tolerances. Equity funds can be chosen by investors to optimise long-term financial appreciation. Long-term gains from equity funds can be higher. Alternatively, to optimise capital preservation, investors might choose conservative funds that are invested in bonds. They may also select a hybrid plan in conjunction with a combination. Investors must speak with their financial advisor to understand the benefits and dangers of the funds they pick.
- Funds switching
A ULIP investment enables you to transfer from one fund to another based on your changing risk tolerance and market outlook. You can choose between debt, equity related funds based on your risk tolerance and market knowledge. Before moving funds, you should consider the ULIP performance to date, the market forecast, and your financial obligations. When done correctly, timely fund change could help optimise returns. Typically, you as an investor can make four free changes each year.
- Look out for updates
You as an investor must monitor the fund’s developments frequently. You can alter your strategy and money allocation based on market movement and forecast. An impending financial obligation, for example, might influence risk tolerance and cause you to select a balanced fund. You must also keep an eye out for market opportunities to optimise your gains.
- Do not give up
A ULIP investment has a five-year lock-in term and can provide significant profits over longer periods. As a result, it is critical to stick with ULIPs rather than selling them for fast profits. To make adjustments, you must constantly monitor the market. During a market downturn, you might be able to purchase units at a lower NAV. When the market rebounds, the fund’s value will rise, allowing it to provide larger returns.
A ULIP investment could help you achieve long-term financial objectives, such as purchasing a home. Regular fund monitoring is essential for making adjustments and maximising long-term returns. You must also keep an eye out for market changes to transfer funds and correctly monitor your strategy.