Last Updated on March 25, 2020 by Gopal Gidwani

Investments can be a risky affair. Since investments can be linked to the market, many of you might opt out of it. According to a report, only 2% of the population in India invests in stock markets. Although investments can depend on market performance, a Unit Linked Insurance Plan (ULIP) is one such product that can allow you to control the risk. Before you invest in a ULIP plan, let’s understand the meaning of a ULIP plan in detail.

What is ULIP plan?
A ULIP plan can be a combination of dual benefits under a single integrated plan. With a ULIP plan, you can receive the benefits of investment as well as insurance together. While ULIP insurance can let you protect your loved ones, ULIP investment can allow you to receive returns based on your risk tolerance and fund selection.

Every investor’s risk appetite can vary. As an investor, you might either have an aggressive investing habit or risk-averse investing habit. Hence, you should consider your risk appetite before choosing ULIP funds. Let’s understand what type of ULIP funds can be suitable for you based on your risk appetite.

1) High-risk appetite
When you are young, you might have fewer financial responsibilities. Due to less financial duties of your family, you can afford a high risk. When your risk appetite is high at a young age, you should invest in equity funds. Under equity funds, you can receive ULIP returns based on market performance. For instance, when the market is in good condition, you can obtain relatively high returns. However, analyse the market scenario before you invest in equity funds. It will ensure you have high returns on investment in your hands.

2) Low-risk appetite
As a risk-averse investor, you might prefer to stay away from market risks due to higher financial responsibilities as you grow older. When your risk appetite recedes, you might not be fond of equity investments to earn high returns. Hence, you should park your savings in debt funds due to lower risk appetite and higher financial responsibilities. However, investment in debt funds can provide you with low returns due to low involvement of market risks.

A ULIP plan is a financial tool that can allow you to diversify your investment portfolio with the help of the switching feature. Let’s understand the functioning of a switching feature under a ULIP policy.

The switching feature can let you switch between equity funds and debt funds. For instance, if you have chosen equity funds due to high-risk appetite, you can opt for debt fund when your financial responsibilities increase. With the switching feature, you can secure your invested capital as well as maximise your returns during market volatility. For instance, if you predict a market downfall, you can shift a major proportion of your money to debt funds. You can switch back to equity funds when the market bounces back.

Ideally, many insurance companies can provide you with switching option under a ULIP plan. When you purchase a ULIP plan, you can manage the fund switches with the help of a fund manager or directly on the online portal of your insurer. If you wish to opt for an offline switch, you should confirm whether your insurer secures the translation process for changing the asset allocation.

There can be times when you might not be well-versed with the market scenario. If you are not market-savvy, you can opt for allocation of your assets or the ‘wheel of life’ portfolio strategy provided by a ULIP policy. While your fund manager can look after the switches between equity fund and debt fund, your funds can be taken care of automatically under the ‘wheel of life’ strategy.

To conclude, a ULIP plan can match the risk appetite of every investor. Whether you are a risk-taker or a risk-averse investor, you can choose a ULIP investment based on your risk appetite and investment goals. Before you choose a ULIP plan, you should carefully analyse your risk tolerance and invest accordingly.