Unit-Linked Insurance Plans or ULIPs are the only insurance products that offer dual benefits of investment and insurance. Apart from being extremely transparent, ULIPs provide a multitude of options to safeguard your returns from the changing scenarios of the market.
The option of fund switching is one such; it allows you to tweak your investment portfolio to keep it safe from fluctuations of the market. Switching funds in ULIPs is easy and doesn’t attract tax or any other penalty. Read on to know everything about the option of fund switching in ULIP plans.
- The Advantage of Switching Funds
The primary advantage of switching funds is to leverage gains from funds that are performing well according to the market conditions. This way you can mover your funds that are not yielding profits, in the funds that have better gains. You have the option of transferring the units entirely or partially to different fund options – debt to equity or vice versa. However, you must always keep track of the fund performance so that the switches can work in your favour. It is straightforward to track your scheme’s performance in ULIP plans, as leading insurers declare the fund’s net asset values periodically.
- How to Switch Funds?
Majority of the insurers provide two options to execute a request to switch funds. They are:
- By Submitting a Form: You must submit a filled and signed form at the nearest branch of the insurer. It should have the exact details of – the existing fund, the new fund to which you wish to switch, and the amount to be transferred. On the basis of your request, your funds will be allocated accordingly.
- Through the Insurer’s Portal: The policyholders can also switch funds through the self-service option offered by insurers on their portals. You can log on the portal, request the amount to be transferred as well as the fund in which it has to be transferred, and your request will be processed.
You can also opt of automatic switch option under which a fund manager will switch your funds on your behalf.
- When to Switch?
Anticipating profits or losses correctly every time is not possible. However, you can switch to debt funds if you foresee that there might be a drop in the market and once the market rises you can again change back to equity.
If you are nearing your financial goals – in case your child is about to go college, then you should shift a large chunk of your investments in debt funds. For instance, if you are 25 and have invested Rs. 2 Lakh in equity funds for 35 years, it will be wise to shift some of that amount in debt once you get married. By doing this, you will keep a part of your investment risk-free so that you will not take a complete hit if the market drops.
- Impact of Switching Funds on Your Investments
· The effect of switching funds mainly depends on the type of product you have purchased. Many insurers offer the sum assured or the value of fund on maturity, while others tend to keep the payouts for investments and insurance separate.
· When Insurers Offer Fund Value Or Sum Assured: In this case, the mortality charges are calculated by differentiating sum assured and fund value. Which is why you have to be extremely careful while switching funds as the amount of insurance will vary according to the value of the investment. It is also important to note that fund switching in the initial years of investments won’t affect the insurance coverage, but it's better to allocate your assets to debt when your investment is nearing maturity.
· When Insurers Separate Payouts for Investment and Insurance: In this case, the mortality charges are calculated on the total sum assured for the tenure of the policy. However, as the insurance cover is decided at the time of purchase of the plan and any changes in the portfolio will not affect it.
The option of fund switching is what makes ULIP plans better than other market linked investment schemes. However, you must be careful with this option to get higher returns on your investments. To choose the best ULIP plans, one must look for an insurer who allows a number of free switches for a financial year. Insurers like Future Generali allow 12 free switches in a fiscal year, allowing you to make the best out of your investments. So, hurry up purchase a ULIP plan and start earning good returns on your investments.