Most ulips offer several fund options across equity and debt asset classes and in addition offer investment strategies to make optimum use of the premium paid.
The tax-saving season has begun and will end on March 31, 2019, which is falling on a Sunday this financial year. Most taxpayers would be scurrying around to find the right tax saver and may make an investment mistake in the process. Remember, tax saving should only be incidental to your investments, rather link it to one of your long-term goals.
Unit-linked insurance plans (Ulips) are one such tax saver which suits investors who do not have financial discipline and inclination to keep investment and insurance separate but yet need to save for their long-term goals. Additionally, they still need to take adequate life cover preferably through a pure term insurance plan.
Here is how Ulip works: The premiums paid, after deduction of initial charges, if any, are put into different asset classes or fund options. Most Ulips offer several fund options across equity and debt asset classes and in addition offer strategies to make optimum use of them. The premium may be allocated in any of the large-cap, mid-cap or small-cap equity fund or even in the debt funds of a Ulip as per one’s choice. It refers to a fixed portfolio strategy.
Thereafter, the policyholder may choose to change the allocation pro-actively online or offline by making a switch. In addition, Ulips offer the following strategies for the benefit of the policyholder.
1. Automatic Transfer Strategy
Similar to systematic transfer plan (STP) in mutual funds, there is ATS – Automatic Transfer Strategy in Ulips. Under ATS, one may park the premium initially in the debt fund and then systematically transfer a certain fixed amount each month into any of the chosen equity fund. One of the advantages is that it doesn’t expose the entire premium to the stock market and secondly helps in accumulating units at a lower cost through rupee-cost averaging.
ATS can be known by different names such as Automatic Transfer Plan (ATP), across different insurers. While discussing the Ulip plan with your insurer, know whether the plan offers it. This feature may be added right at the commencement of the policy or can be added later on. Many insurers allow this feature to be opted by logging in to one’s account online.
2. Target Asset Allocation Strategy
Several studies done in the past have shown that asset allocation plays an important role in determining the final return of an investors portfolio. Therefore, its important to allocate your premium between funds as per your risk appetite and the goal horizon.
Many Ulips offer this feature of Target Asset Allocation Strategy, wherein the policyholder will have to give a mandate to allocate one’s premium in a fixed proportion between equity and debt to be maintained throughout the policy term. Once allocated, you can then maintain the allocation with quarterly re-balancing. The re-balancing of units is generally done on the last day of each policy quarter. As a policyholder, one can avail this option at the inception of the policy or at any time later during the policy term.
3. Life Cycle based Portfolio Strategy
The Life Cycle based Portfolio Strategy is a strategy to create an ideal balance between equity and debt, based on one’s age. Under this, as one age, the allocation in equity funds automatically keeps coming down while allocation in less volatile debt funds keeps increasing. Those who are not sure about the right asset allocation across funds may opt to choose this strategy.
4. Trigger Portfolio Strategy
The Trigger Portfolio Strategy is one feature wherein the Ulip policyholder can take advantage of substantial market swings and invests on the principle of “Buy low and Sell high”. Under this strategy, the premium will initially be distributed between two funds – equity oriented fund and Income Fund – a debt oriented fund in a certain proportion, say, 75%: 25%. And then, as and when the fund allocation gets altered due to market movements, the insurer will re-balance the funds in the portfolio based on a pre defined trigger event. Illustratively, a 10 percent upward or downward movement in the NAV of the equity since its previous re-balancing, will trigger the change in allocation.