With equity markets on a new high and with an expectation for it to soar further, Unit Linked Insurance Plans, or, Ulips provide a cost-effective way of entering the equity market. They not only offer a professionally managed investment-cum-protection platform, but also provide an entry point into the growing equity market. Alongside equity, investments in highest rated debt instruments also make Ulips a perfect choice for investors who are looking for a long-term investment instrument that offers features like transparency and flexibility.
Ulips offer an array of fund options with different asset allocations that meet the requirements of policyholders with different risk appetite. While leaving the fund management to experts may be the best option, some customers are particularly savvy and would like to monitor their fund movement. Ulips offer several options to customers in order to provide complete access to invest their premiums in well established suite of investment funds of Insurance companies, ranging from 100% debt to 100% equity.
Optimising Asset Allocation
The primary determinant of risk and return in a portfolio is asset allocation. By spreading investment across different asset classes, investors can create a diversified portfolio where the loss that one may make on a certain asset class can be compensated by the profits that are made on another. Thus, you reduce the overall risk of your investments. Keeping this in mind, Ulips offer policyholders the option of free switches between funds, so that they can effectively manage their portfolio asset allocation.
Using free 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 benefit from switching strategies as appropriate switches can take advantage of the movement of asset prices resulting from changing financial and economic conditions. Here are a few tips to make the decision simpler and exercising your free switching options optimally:
1. Selecting between Debt & Equity funds:
Which and how much of each asset one must own is a function of one’s risk tolerance as well as one’s 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 the erosion of the principal invested. Depending on one’s risk appetite, life stage needs, one must select between the debt and equity ratio.
2. Life stage needs:
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 and as they get older. They should, intuitively, switch from more risky equity funds to less risky cash and debt funds as they get older.
3. Look for semi-controlled switching options:
Not everyone would have the know-how to actively monitor the fund movement and manage their portfolio asset allocation. So Ulips also offer a semi-controlled fund management opportunity. This option switches the funds automatically as per a set of instructions given by the policy owner. It can also be used to make programmed switches every month. A fixed amount can be switched monthly from one fund to another fund on a fixed date. The policy owner can specify the funds from which the desired amounts are to be switched out and the funds to which the amounts are to be credited.
4. Understand the overall economic scenarios:
Ones perception of how various asset classes will perform in different economic scenarios could also influence one’s switching decision. For example, if equity markets look significantly overvalued and expensive, policyholders may switch out of equity funds only to switch back when equity markets correct substantially. Many insurance funds offer auto-trigger options that allow for automatic switching based on the behavior of the underlying assets in the fund. The bottom line? Since these are long-term market-linked plans, you should review and manage them appropriately to optimize your asset allocation, minimize risk and maximize returns. If you are not confident of managing it yourself, does not mean you will lose out the opportunity. You can always take advantage of the auto-manage options offered by the insurer. Afterall you do pay them fund management charges.
(The author is head- eBusiness, marketing and product management, IDBI Federal Life Insurance)