The moment an individual plans their finances, one of the biggest decisions they make is choosing their investment. There are several investment options, ranging from stocks to bank deposits that one can choose from. Depending upon one’s risk appetite, they can make their choices. However, the reducing interest rates on fixed deposits is driving people to look for alternative options. The rate of interest on them cannot match the rate of inflation in the country. Whereas people hesitate to invest in a stock market because of the high risk involved. While diversifying their investment is the best option, most people do not have sufficient funds to diversify their wealth. An ideal investment would be one where one can switch between different funds freely and make the most of the market fluctuations. This is the reason several individuals choose to buy a Unit Linked Insurance Plan (ULIP).
A ULIP policy is a financial instrument that offers the dual benefits of insurance and investment. The premiums that you pay when you buy a ULIP are half-used towards providing life cover and investing in funds of your choice. This makes ULIP a perfect investment choice, as along with protecting the future of your loved ones, it also helps in wealth generation. The insurance component of the ULIP works like any other insurance. In case of your sudden demise, the nominee of your policy will receive the sum assured as per your ULIP contract. They may also receive the funds invested along with the returns. The investment component of ULIP, when understood well, can accelerate your returns. Here are some ways to maximize gains on a ULIP.
Choose funds according to your risk appetite
When you buy a ULIP policy, you can choose the allocation of funds based on your risk appetite. If you do not have many financial responsibilities, you can choose to take the risk. In that case, you can buy equity funds as they offer high returns but come at high risk. If you do not want to take any risks with your funds, you can simply choose debt funds. Your money is at low risk in them, but compared to equity, the returns are also quite less. If you are confused between the two, you can simply choose both with a balanced fund. In a balanced fund, half of your money is invested in equity and the other half is invested in debt. This ensures that the risk is moderate, but so are the returns.
Be in it for the long-term
For boosting the returns of your ULIP, ensure that you keep it for the long haul. The longer the term of your ULIP, the more you can get the benefit of compounding. This helps in accumulating wealth in the long haul as you earn interest not only on the principal amount, but also on the interest of the previous years. With a ULIP plan calculator, you can get an estimate of the returns on your funds. Also, most ULIPs have a lock-in period of 5 years. After the lock-in period, you can avail of partial withdrawals whenever you need funds.
Make the most of the market volatility
ULIP as an investment is flexible and dynamic. Unlike a typical investment where you cannot alter your allocation, a ULIP allows you to switch amongst different allocations anytime you want. You can switch between debt funds and equity funds whenever you want. This allows you to maximize gains on ULIP by making the most of the market variations. Timing the market and switching your funds accordingly is the key. Also, many people prefer to invest in equity funds in the beginning and once they have earned high returns, they transfer their investments to debt funds.
Align your investments with your goals
Whenever you choose an investment, the reason behind that investment matters. What is the goal towards which you are investing? It can be any goal – be it travelling, your child’s education, buying a house, or simply building a retirement fund. Once you know your financial goal, calculate the money you will need to achieve it. Based on the wealth you need to achieve your financial goals, invest in a ULIP accordingly. Use a ULIP plan calculator to know the approximate returns you will receive on your investments. You will also get an estimate on the sum assured on the maturity of your ULIP.