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Are ULIPs Enough for a Diverse Financial Portfolio?

  3/1/24 12:07 PM

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  3/1/24 12:07 PM   |

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Diversifying your investment portfolio is one of the most effective ways to mitigate market risk. Fund managers do this by spreading the investment across asset classes, such as debt, equity, real estate, gold, and commodities. The goal is to reduce big losses by compensating for the underperformance of one asset class by the overperformance of others. A ULIP helps you achieve exactly this. It lets you invest in market-linked funds of your desired asset mix, as per your risk tolerance and financial goals. In fact, investing in a ULIP can be enough to achieve a diversified financial portfolio.

ULIP Investment – What Does it Mean?

The money you invest in a ULIP goes towards providing your life cover as well as your market linked funds. These are invested in equities, debt instruments, or both. In general, equity and debt are distributed in a 75:25 ratio in such plans. The fund manager is responsible for allocating the amount invested in each type of instrument as per your life goals and risk appetite. For instance:

  • They might Invest only in equities to generate the highest possible returns. However, this comes at greater risk since stock prices are known to be volatile.
  • They could invest in only debt funds that are known for lower risks but also lower returns than equities. However, remember that debt funds cannot be entirely risk-free. They offer returns that are higher than risk-free investments like FDs but since debt funds are market-linked, they cannot guarantee returns.

ULIPs let you invest in both equities and debts to diversify the portfolio with the aim of bringing you the best possible returns. You can also switch between funds to stay aligned with your financial goals and risk appetite. This way, investors can balance the risks from equities with the stability of debt investments. Thus, ULIPs help maintain a portfolio based on your risk-taking ability. Further, it lets you make the most of market movements by allowing you to switch funds between asset classes. You can restructure your portfolio based on changing personal needs too.

How Does ULIP Help in Diversification?

You have the flexibility to move from investing a higher portion of your funds in equities to a higher portion being invested in debt instruments and vice versa. A ULIP also allows you to choose your preferred proportion to balance the risk and expected returns. You can switch your funds anytime during the policy. This must be done in a carefully calculated way to minimise market risks and maximise returns.

It is important to keep managing your ULIP portfolio from time to time. Otherwise, excessively high risks can lead to more losses, while taking minimal risks can affect the investment growth potential.

Tips to Diversify Your ULIP Plan

Below are a few ways to diversify your ULIP portfolio:

1. Analyse Your Financial Goals: Investing in equities can be ideal for long-term goals but risky for short-term goals. You can start with equities in your early 20s when you are single or starting your career and have fewer responsibilities. Stay invested in equities to see your wealth grow in your 30s when you are married or need to pay off loans down the line. Gradually, shift to debt instruments when you are nearing your financial goal, say in your early 50s. This helps to save the returns against losses and build your savings for retirement.

2. Know Your Risk Appetite: Before making a switch, consider the risk that you can afford to bear. For instance, take your income, savings, and dependants into account. This will help you understand how much capital you can afford to risk.

3. Review the Portfolio: Check your ULIP portfolio regularly, at least once a year. Keep a close eye on the performance of your funds and the market volatility to make sure the portfolio is being managed efficiently.

ULIPs also allow you to invest 100% of your funds in equity instruments. When you are nearing maturity, the equity exposure is decreased, and the funds are switched to more stable debt funds. In short, ULIPs let you have complete control over your invested funds. Investors can make it as risky or as safe as they wish to, based on their changing risk appetite and financial goals. However, make sure to learn all you can about the plan and how it can help you diversify your investment portfolio before making a final choice.


Neha Panchal - Financial Content Writer

Neha used to be an Engineer by Profession and Writer by passion, which is until she started pursuing full-time writing. She's presently working as a Financial Content Writer, with a keen interest in all things related to the Insurance Sector.

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