Market investments are always viewed as risky game. Many people tend to invest in the market with the belief that they will get good returns. However, investing in the market is associated with various risks. The main risk being the fluctuations. Depending on the activity, the market could go up or down, impacting your investment. There is no safety provided for your investment either, so you could end up losing your money.
If you are looking for a mode of investment that provides you different options of investment, but at the same time, offers life cover to deal with life risks as well, you should opt for a ULIP plan. However, even ULIPs have different risks associated with them. What are these risks? And how to deal with them? More information given below.
What is ULIP?
A ULIP plan is a life insurance policy that offers you the benefits of investment and insurance in a single policy. The premium that you pay for a ULIP is split into two. One part of the amount is used in providing the life cover. The other part is used for investment. You can invest in either an equity fund, debt fund or both funds, as per your risk appetite and life goals. ULIPs are a great investment option for a long-term goal. The returns that you gain when you opt for a long-term policy helps in achieving your life goal and gives you a financially secure future.
What are the risks associated with ULIPs?
Like every other financial instrument associated with investment, there are different risks, just like there are ULIP benefits. Listed below are some of the risks associated with ULIPs:
- Market risks
ULIPs offer you the choice of investing in two types of funds: equity and debt. When you opt for equity funds, your money is invested in stocks of market-listed companies. These stocks could be small-cap, mid-cap or large-cap. This is basically how much the capitalisation of the company is in the market. Equity markets carry a huge risk factor, as the companies listed in them are more exposed to market fluctuations. Despite this risk, investing in equity market offers good returns.
Debt market is basically investing in government bonds and securities, corporate bonds, cash market, bank deposits, etc. Compared to an equity fund, debt fund has a low risk factor and offers low to medium returns.
- Policy charges
There are various policy charges associated with ULIPs. These charges are related to the management of the policy, managing the funds, etc. Most of these charges are deducted from the premium paid towards the policy itself. These charges are usually incurred on the policyholder during the initial years. However, if you are confused about managing the investments by yourself, the insurer will offer you the services of a fund manager. The fund manager will handle all the investments on your behalf as per your instructions. Availing this service can cost more due to the expertise offered.
- Lock-in period
ULIPs have a lock-in period of 5 years. Surrendering the policy before the lock-in period ends could be a loss-making decision. Even if you have paid the full premium, you will not be able to access the amount you have invested. You will be required to wait for the 5 years to be completed before you can access your investments. After the lock-in period ends, you are eligible for partial withdrawals, which are chargeable by the insurer. Even these withdrawals have limits and impact your investment and sum assured.
How to mitigate through these risks?
- To enjoy full ULIP benefits, it is always advised to invest in balanced funds, i.e, in both equity and debt funds at the same time. This helps in reducing the risk associated with fluctuations. ULIPs allow you to switch your investments from one fund to another. This allows you to focus your investments in either equity or debt fund based on your risk appetite. Investing in both funds and taking advantage of the switching option helps you in weathering out the risks in the long run.
- Always opt to manage your funds on your own. While it may be difficult in the beginning, after a certain period, you can easily understand how to manage it by yourself. This not only helps in reducing charges associated with a fund manager, but it also allows you to be in control of your investments.
- If you wish to surrender your policy before maturity, it is advised to wait till the end of the lock-in period. This way you can immediately access your investments and withdraw the money and whatever returns you have earned on them.
These are just a few risks that are associated with ULIPs. If you wish to know more risks that are associated with ULIPs and the types of ULIP you can invest in, you can get in touch with your insurance advisor.