How Much Money Should I Park Under Different ULIP Funds?

ULIP policies are offered by insurance companies to cater to the needs of the people looking for insurance coverage and wealth creation at the same time. The working of these policies involves the segregation of the premium paid by a policyholder into two, with one part being used up for the insurance coverage. The remaining or the second portion of the premium is used for investment in various types of financial instruments, including debt and equity, thereby offering investors a chance to earn some returns on their money. ULIPs are a popular investment choice since they allow investors to stay financially secure against emergencies while creating wealth for meeting long-term goals. The choice of the investment instrument and the amount to be invested in a ULIP fund depends on several factors, like the investors’ goals, riskappetite, and the availability of funds with them. Read on to know more about the factors that should be considered before parking funds in ULIPs.

The Working of a ULIP

Investments in ULIP and the returns from this scheme are driven by market fluctuations. The scheme involves usage of the premium paid by a policyholder for two purposes:

• Insurance
• Investment in various funds, like equity, debt, balanced, or growth.

The investment in these funds happensbased on the asset allocation specified by the policyholder. These funds are further managed by professionals who are well versed with the working of the financial markets and their movements, thereby allowing the policyholders to benefit from the market changes.

The insurance company allocates units to each investor in proportion to the funds invested. Based on the market changes, the values of these funds change and are used for the calculation of the Net Asset Value. On the maturity of the policy, the policyholder gets the fund value (which is the NAV of the units held); but in an unforeseen situation, such as the passing away of the policyholder, the insurance pays the nominee the higher of the sum assured or the fund value. Understanding the correct meaning of ULIP is important for an investor looking to use his spare funds for the creation of wealth.

How Much to Invest in ULIP Funds

ULIPs offer investors a chance to invest their funds in varied instruments having different return and risk profiles. The allocation of the amount to be invested in these categories is decided by the investor based on thefollowing factors:

• Goals and Their Timing– ULIPs offer an attractive opportunity to create a corpus for meeting long-term goals,such as buying a home or funding a child’s education or meeting retirement expenses. The amount to be invested depends on the goal to be achieved and the time by which it has to be achieved. Investors can use a ULIP return calculator to find out how much to invest and for how long to get specific returns or fulfil a goal.
• RiskAppetite- The choice of the instrument and the amount to be invested will depend on the riskappetite of the investor. A person with a low-risk preference can choose to invest in debt funds that offer stable returns. Similarly, a person with a high-risk appetite can invest in equity funds that offer good returns over a longer duration.
• Availability of Funds- the amount to be invested in a ULIP will also depend on the savings of an investor. Since ULIP is a long-term plan with a lock-in period of five years, investors need to choose the policy amount based on their income and savings. Regular payments of premiums are a must for the continuation of the policy, so investors should choose that amount which they can easily afford to pay regularly. It is best to take a policy of a lower amount first and increase the coverage or the assured amount at a later stage by making additional top-up premium payments.

Investors with a long-term investment horizon can invest more in equity funds in the initial period and switch to debt or balanced funds after some time. This is possible through the switching option offered by the insurance company.

To conclude, the amount that you should invest in different ULIP funds should be finalised after identifying and quantifying your goals based on your riskappetite. You can also take the help of a ULIP calculator to determine how much to invest for a specific maturity amount.