A Unit Linked Insurance Plan or a ULIP offers you the dual benefits of insurance and investment. When you invest in a ULIP plan, a part of your money is used to provide you with a life insurance cover, and the remaining amount is invested in market-linked securities as per the combination of funds chosen by you.
A crucial point that you need to note is that ULIP returns are not fixed, as it depends upon the market performance. That is why ULIP providers allow you to choose between equity funds, debt funds, or a combination of both. You can even switch between your funds in the middle of a ULIP policy tenure.
Continue reading to know more about the ULIP switching option and when you should exercise it.
What is Fund Switching in ULIPs?
When you invest your money in a ULIP plan, you have the option to select from a range of funds. These funds can be equity, debt, or a combination of both. Depending on your risk appetite and investment objective, you can allocate your investments to these funds.
For example, if you’re a young professional, i.e., in your 20s or 30s, you can tolerate a bit more risk, and hence, you can invest in equity funds. Similarly, when you’re in your 40s or 50s and approaching retirement, you should take a conservative approach by investing more in debt funds.
So, when your risk appetite and investment objective change, you need to change your investment strategy as well. And this is where switching between ULIP funds can help. You can use this facility to switch your investments in the ULIP policy from one fund to another.
When Should You Switch Funds in a ULIP Plan?
Now you know that with the ULIP switching option, you can switch your ULIP investments from one fund to another during its tenure. However, it is very crucial to understand when you should switch your funds in a ULIP plan. It’s because insurers usually allow only a limited number of free switches between ULIP funds during a year. So, by unnecessarily switching between your funds, you may incur additional charges.
Here are some trigger points at which you should switch your ULIP funds:
When Your Risk Appetite Changes
The risk appetite of a person may change with their age and situation. For example, your risk appetite may decrease as you become old and your responsibilities increase. In such a case, you can shift your investments from riskier equity funds to debt funds.
If The Market Moves Erratically
Sometimes, erratic market movements may impact your ULIP fund’s performance. So, when you feel that the market can show bearish or bullish movements for longer periods, you can switch your funds from equity to debt funds and even vice versa.
If You’re Not Getting The Expected Returns
There’s no point in staying invested in a fund if you aren’t getting the expected returns. So, if you see that your ULIP fund is not performing as per the expectations even after a few years, you can decide to switch your funds.
When Your Financial Goals Change
It is very crucial to keep your investments aligned with your short-term and long-term financial goals. So, when your financial goals change, you should also change your investment strategy. And hence, it can be a good time to switch your ULIP funds.
Switching between ULIP funds can be a good option to keep your investments aligned with your financial goals and risk appetite. However, you need to use this option wisely, as unnecessary switches between funds can lead to additional charges.
For example, in a Tata AIA ULIP Insurance policy, you can choose from 11 fund options and enjoy free switches between them to keep your wealth creation goals on track.