Before going into the Fund Switching Techniques for Unit Linked Insurance (ULIP) policies, it is good to understand why switching of funds is considered important in ULIP plans.
Investment in Unit Linked Insurance Policies (ULIP) offers a great opportunity to avail good returns along with insurance coverage as one package. But investing in a fund and waiting till maturity and expecting good returns may not be a good strategy.
You will have to monitor the performance of your fund periodically and manipulate the plan accordingly to get desired results. Fund Switching is an invaluable tool, which can be used to control and manipulate your ULIP policy.
One thing you should keep in mind is that Fund Switching is an extremely powerful tool and has to be approached with caution and should be done based on certain principles. Fund switching with out proper technique and timing can bring in negative results also.
This article will provide you an in depth idea about strategies to be followed while using fund switching.
Understanding Funds in a ULIP policy
ULIP policies generally give you an opportunity to allocate your investment into different funds while investing. Funds may have different names like Bond fund, Balanced fund, Secured fund, Growth fund etc. You should have a fair idea about the investment pattern of each funds in your ULIP policy and it can be obtained from the brochures or insurance document of your policy.
Two types of Fund Switching Techniques for ULIP policies
‘Life Stage Based’ Fund Switching for ULIP policies
The principle behind Life stage based switching of funds is that a person can afford more risky investment when he is young. As the age increases it is advisable to reduce risk by moving slowly from equity based investments to bond and debt based funds which bear lower risk profile. This type of switching is market independent and can be done by a person who have little or no knowledge of share market trends.
Fund switching to ‘Maximise’ profit in ULIP policies
In this method switching is done from equity based fund to bond based fund and vice versa based on the market trends. This is easily said than done as the market fluctuations are often unpredictable.
But you can safely switch your funds and maximise your profit by following certain principles.Please remember that prerequisite for this mode of fund switching are sound knowledge in the fund pattern of your ULIP policy and regular follow up of stock market.
Movement pattern of fund values.
View the graphical display of the changes in the fund values of LIC’s Bima plus plan over a period of time.
we can see following facts when we analyse this info graphic.
- Fluctuations are very profound in risk fund as greater portion is invested in equities or share market.
- Gains obtained to risk fund, as a result of bull runs in stock market is often lost in subsequent crashes in stock market.
- Secured fund is generally risk proof and offers steady return.
Fund Switching technique can be used to lock the growth obtained as the stock market moves up and prevent the investment from being coming down when the market goes down.
How to find the best time for ULIP fund switching.
Info graphic shown above can give you a general idea about when and how switching of funds are done depending on the market trends.
Identifying these points requires some skill and thorough knowledge about share market. This may not be possible to all investors.
What is the way out?
I am laying down some principles to be followed to ensure safe and effective switching of funds. You should adhere to all these principles while switching funds.
Nine Golden Principles for Fund Switching and Maximize returns in ULIP policy.
- Start ULIP policy by investing in Bond based fund as it can give steady and risk free returns.
- Be prepared to keep the investment in bond based fund as long as possible.
- Switch fund from Bond Fund to Growth fund only when the stock market has moved down steadily for some time.
- Never wait for the lowest point in the stock market to start switching to Growth fund.
- Never panic if the market is still moving down and wait for the trend to reverse.
- Move again back to Bond fund once the market has gone reasonably high.
- Again, Never try to find the highest point of bull run in stock market to do switching.
- Never try to switch funds in every dips and rise.
- Making more money is good but being safe and not loosing money is more important. So keep your investment in safer funds for most of the time.
Anish L J is a ‘Financial Planner’ and member of Chartered Insurance Institute(CII), London and Insurance Institute of India. He is also a finance, insurance and software consultant. He thoroughly follows the developments in finance, insurance, and other related sectors.