October 7, 2022 (PR) 

Any ULIP policyhas a unique proposition for policyholders in the form of a hybrid offering of insurance and market-linked investments. At the same time, they provide many tax benefits and other advantages, catering to a wide variety of investors. Yet, just like any other investment option that depends on market performance, they have their share of investment risks that you should be aware of. 

Primary Risk Factors of ULIPs         

As mentioned earlier, ULIPs come with direct market-linked risks since the premium is invested in various fund options (after all applicable charges have been deducted). They are usually deployed across equity, debt, and balanced funds.

They also come with a lock-in period of five years, during which you can make no withdrawals from the accumulating corpus. Most ULIPs go for growth options that are more aligned with equity funds. This naturally scales up volatility risks for investors. Yet, the risks can be spread out with longer investment durations of seven to ten years or more. Investors can also switch funds as per market conditions which also reduces the risk to a large extent. 

There is always a risk involved in exposure to the market since funds will always witness changes in returns due to market fluctuations. There may be a positive or negative shift in the funds' NAVs (net asset value) in response to various factors. As a result, the returns are never guaranteed. 

Additionally, past performance trends of funds do not always guarantee successful future performance, while timing the market is next to impossible. Although, before buying a ULIP, the expected returns can be calculated using a ULIP plan calculator online. 

The long lock-in period also brings about risks pertaining to liquidity, as you cannot withdraw your money during this time. ULIPs may also come with certain charges, which may add to your overall outgo initially, although the impact of these charges becomes negligible in the long term. These include charges for fund management, partial withdrawal, administrative costs, costs of fund switching, and more. 

ULIP Fund Types That You Should Know About 

Your risk levels with your ULIP policywill depend mainly on the type of fund you choose. Some of them include the following: 

• Money Market Instruments - These funds will be deployed towards cash and bank deposits along with other instruments with lower risk levels. 

• Balanced Funds - These invest in a mixture of debt and equity funds, including company shares, fixed-interest options, business stocks, and more. These funds have moderate risk levels. 

• Equity Funds - These funds usually invest in buying stocks of companies and equities in the market, carrying higher risk levels but also the highest possibilities of rewards. 

• Debt Funds - These invest in bonds, securities, fixed-income instruments, and the like. Their returns are relatively lower, but the risks are also lower. 

These are the types of funds that you can choose to invest in. They naturally have a direct impact on the level of market risks that you have to face. As a sensible investor, you should only choose funds based on your risk appetite. You can also select funds based on your life stage or future financial goals. 

Should you invest or not? 

ULIPs are beneficial investments from various perspectives. First, you get life insurance coverage which is helpful for your nominees/family in case of your untimely demise within the policy tenure. At the same time, there are options to build wealth for the future and accumulate a corpus through market-linked investments. 

Yes, these plans carry a certain risk level owing to market volatility and other factors. However, the risks can be spread out over a longer investment tenure, and one automatically gains through the power of compounding. At the same time, people can choose the funds they wish to invest in with their ULIPs. They can also periodically switch their funds to earn higher returns or lower the risk levels. These features of a ULIP bring down the risk factors to a large extent for investors. 

Alternatively, you can choose to let the insurance provider manage your fund. That way, your investment will be handled by seasoned fund managers who know the nitty-gritty of the market and can navigate your corpus safely through various market situations. 

Suppose you are young and have just started your career without any financial responsibilities. You can then take more risks in order to accumulate a sizeable corpus. You can choose to invest more in equity funds with your ULIPs as a result. You can switch to debt funds if the equity markets are not doing too well. You can switch back to equity when the market picks up. You can switch towards debt fund investments when you get older and have more responsibilities. You can use the same fund-switching strategy to maximize your returns or lower your risk levels accordingly. 

Hence, considering the risks, you can invest in ULIPs to get the dual benefits of insurance and investments with the right strategy from the outset. They can be great investments for creating wealth over the long haul, although one must be disciplined and alert regarding market trends.