ULIP are hybrid products that offer the dual feature of providing life cover as well as work as an investment option, which if managed well, has the potential to increase your wealth based on market-linked returns. While everyone should be investing in funds based on their risk appetites, the fund switching option in ULIP plans does offer a lot of flexibility that allows you to change your portfolio allocation within the overall ULIP structure.
But that’s easier said than done. And to ensure maximum returns based on your risk-based requirements, you would have to be careful about using the fund switching option wisely in the ULIP policy.
Here is a short primer on how does the fund switching option of ULIP works for its policyholders.
How Does ULIP Fund Switching Work?
The Insurance providers offer different types of funds within the ULIP to invest and benefit from the returns in the financial market. As an investor, you have the choice to pick any fund offered by the insurance company to suit your needs.
For example, if you prefer high risk and greater returns, you can choose equity funds. On the other hand, there are debt funds to secure your investment and make reasonable debt-type returns. And, if you want to strike a balance between the risk and returns, there are hybrid funds that combine equity and debt in different proportions.
Here is a sample of available fund options in a popular ULIP policy:
- Multi Cap Fund – This invests in a diversified portfolio of Large Cap and Mid Cap companies. The allocation between Large Cap and Mid Cap companies will be largely a function of the relative valuations of Large Cap companies as against Mid Cap companies. The fund can hold 60-100% in equity and 0-40% in debt.
- Top 50 Fund – This invests in the top 50 stocks that are a part of Nifty 50 Index only. It may or may not replicate the index stock weightages. The fund can hold 60-100% in equity and 0-40% in debt.
- Top 200 Fund – This invests in selected companies from the top 200 stocks in the market or BSE200. The fund can hold 60-100% in equity and 0-40% in debt.
- Whole Life Aggressive Growth Fund – The fund aims to provide higher returns in long term by investing primarily in Equities along with debt/ money market instruments. The fund can hold 50-80% in equity and 20-50% in debt.
- Whole Life Stable Growth Fund – The fund aims to provide stable returns by balancing the investment in Equities and debt/ money market instruments. The fund can hold 30-50% in equity and 50-70% in debt.
- Whole Life Income Fund – The fund aims to generate income by investing in a range of debt and money market instruments of various maturities with a view to maximizing the optimal balance between yield, safety and liquidity. The fund can hold 60-100% in debt and 0-40% in cash or money market instruments.
Now you may start from one fund option, but later on, if you want to modify your investment, you can switch to a different fund during the policy term. It is referred to as the fund switching option in the ULIP plan. For instance, if you are not satisfied with the returns in hybrid funds and the market is moving upwards, you can switch to equity funds.
So basically, fund switching gives the option to policyholders of ULIPs to move their investments from one fund to another, within one plan. You can transfer the units fully or partially between fund options.
When Should You Switch Between the Funds in ULIP?
The time you decide to switch between the fund options in ULIP is significant to your investment returns. Here are a few thoughts on this:
- If you are well-versed with the markets and regularly keep updating yourself on the market conditions, then you can switch between the fund options based on your view of the markets. This sounds like something that is best left to the pros. But if you think you can manage it well, then go ahead.
- Decide to switch at different milestones in your life, such as choosing equity funds at the start of your career, hybrid funds after a few years and eventually, debt funds as you get closer to your retirement age.
- If you have purchased the ULIP plan for a specific financial goal, then switch to a debt fund as you near the goal to secure your returns.
- If you hold a ULIP and you have an investment advisor, then the advisor can help decide the fund allocation and switched based on how the ULIP is used as a part of the overall financial plan.
What are the Advantages of Switching Funds in ULIP?
- The switching option in ULIP does not affect your insurance cover in any manner. In case of your sudden absence, the death benefit is paid out to your family.
- You can tailor your investment and returns based on your risk profile and changing life commitments and goal profiles.
- If you are not sure about the impact of an economic change in the market, you can always switch to debt funds to make it secure and align it with the money goals in your life.
- You can make the fund switching in ULIPs yourself based on the requirement or seek the help of an expert investment advisor.
- These days, insurers offer quick and effortless processes to switch between funds. For instance, there are many insurers that offer several goal-specific ULIP policy You can choose between the several fund options offered in the policy and customise it as per your preferences.
How to Switch Between the Funds?
Insurance providers offer online and offline modes to switch between the funds.
- Online mode – You can visit the web portal of your insurance provider, log in to your profile and enter the necessary changes and the extent of transfer to the fund options online for execution.
- Offline mode – You can visit the nearest branch of your insurance provider, get the registration form to make the necessary switches, fill in the required details, and submit the duly filled form for its execution.
What are the Charges Associated With the Switching of Funds?
There are specific fund switching charges that occur when you switch between the funds in the ULIP policies. Insurance providers offer a predefined number of free switches for the plan every year, and every switch made after that will cost Rs 100-500 as per the insurer’s terms and conditions about fund switching.
Taxation of Fund Switching in ULIPs
There is no tax applicable on fund switching in ULIP apart from the charges levied by your insurer for offering this facility. This is one extra benefit that is not available in other investment products. But you must keep in mind that tax will be applicable on the maturity benefit if the annual ULIP premium is more than Rs 2.5 lakh.
Though I have my reservations about mixing insurance and investments, I would also say that compared to traditional endowment plans, the ULIPs are a better bet. At least, the switching between the fund options in ULIP gives one the flexibility to tailor your investment as per your financial needs with market-linked returns.