Last Updated on March 30, 2020 by Gopal Gidwani
One of the most popular fears about investments can be that it is risky. According to a survey, only 2% of the Indian population invests in equity shares. While risks can be a part of an equity investment, there are specific investment tools, such as a Unit Linked Insurance Plan (ULIP) that can let you manage the risks effectively. Before you choose a ULIP investment, let’s gain a better understanding of the meaning of a ULIP plan.
What is ULIP?
A ULIP plan is a non-traditional financial product, which has clubbed the dual-benefits of investment and insurance under a single roof. Moreover, it is a convenient, affordable, and flexible investment product. The primary reason for the formulation of a ULIP plan can be to offer financial security to your family while you get to participate in the capital market.
After understanding the meaning of a ULIP policy, let’s proceed further to know how to control risks with a ULIP policy.
1) Consider your investment goals
Investment goals can depend on three crucial factors, such as:
a) Age
Age can be further split into adulthood, middle-age, and retirement age. Based on your age, your investment goals can vary.
b) Outlook
Outlook can allow you to build a solid ground for you on which you can operate the choices you make that can impact your wealth.
c) Income
Income can be an essential factor of consideration for investment. If you do not have sufficient money to invest, you might not be able to achieve your goals.
2) Analyse your risk appetite
The involvement of risks can be high due to market volatility. The constant fluctuations in the market can make it difficult to predict your gains. Therefore, it can be crucial to analyse your risk appetite before you opt for a ULIP investment. As an investor, your risk can vary from high to low based on your age and financial responsibilities. For instance, if you have minimal financial responsibilities at a young age, you can afford the risks of the market. However, increased financial duties of the family at the later phase of your life might not allow you to take risks.
3) Choose the right fund
A ULIP plan is a flexible investment option that can allow you to choose between the two main types of top performing ULIP funds:
a) Equity funds
The equity funds of a ULIP policy can be directly linked to the market. Hence, it can be a risky investment option since the returns are generated based on the performance of the market. When the market is in good condition, you can receive relatively high ULIP returns and vice versa.
b) Debt funds
Under debt funds, risk involved is usually low. Since they are less-risky, you can invest in debt funds if your risk appetite is low. When you choose debt funds, you are more likely to gain low returns.
4) Utilise the switching feature
Although a ULIP investment is a market-linked product, it can give you the opportunity to control the market risks. A ULIP policy can provide you with a switching feature that can ensure your invested capital is secure from fluctuations. Moreover, you can move your assets from equity fund to debt funds when the market is down. After the market bounces back, you can shift back to equity funds to receive higher gains.
As highlighted above, the risk element of a ULIP plan can depend on the current state of the market. As an investor, you should keep a check on the market scenario to stay updated about the trends. That way, you can effectively manage the risks as well as move your assets based on the performance.