Switching Between ULIP Funds- How It Works and When Should You Switch

Market-linked investments usually come with a degree of risk and uncertainty regarding their returns. With the financial markets fluctuating regularly, it becomes necessary to keep track of them and see how your investments are faring. Consequently, it is typical for investors to modify their asset allocation periodically to ensure their investment is in a well-performing asset. Unit Linked Insurance Plans (ULIPs) offer great flexibility in this regard. 

ULIPs mix the best of insurance and investment, where your premiums are invested in market-linked instruments after deducting all applicable charges. Simultaneously, you get life cover for a sum assured that makes sure that your family will be financially secured in case of your untimely demise. This duality itself makes a ULIP plan a very compelling proposition for investors. But there is more. 

Have you heard of fund switches in ULIPs? These are some of the most significant features and benefits of these plans, making them compelling investments for the long haul. To further discuss this, here is a brief guide about switching ULIP funds and other factors you should be aware of. 

Fund-Switching - What it essentially entails

Want to know how much you can anticipate over a certain period with your ULIP investment? You can always utilize an online ULIP plan calculator to compute the amount in this regard. But since the returns are subject to the market performance of the funds you invest in, the amount is an estimate, and this is where fund switching comes into play. 

When you invest in a ULIP, you can invest in four kinds of funds, i.e. liquid, debt, equity, and balanced. Every ULIP plan lets you invest in a diverse pool of funds you choose initially. You can select these funds based on your risk appetite and future financial objectives. But your initial choice of funds is not fixed, and you can change your funds when you deem it necessary. This is known as fund switching.

The insurance provider will offer these fund-switching features, where you can shift investments across funds within the same policy. Units may be fully or partially transferred between the fund options available. This feature helps you understand the market scenario and shift away from funds that are not performing well to those that are doing better. 

When it comes to maximizing your returns, you should definitely utilize the fund switches available to you. Those with a higher capacity for risk can consider investing more in equity funds while allocating some amount to debt funds. However, risk-averse investors may switch their investments towards a higher proportion of debt funds and allocate a smaller amount to equity funds. Depending on specific preferences, one can also choose to be fully invested in either debt funds or equity.

When should you be switching funds in a ULIP? 

You should regularly monitor your ULIP fund performance to ensure correct fund switching. This is possible by tracking the NAV (net asset value) that the insurance company periodically declares. While it is impossible to precisely predict market movements, you should only switch funds when you feel it is time to rebalance your portfolio in response to the market performance. For example, if the market is volatile, you may consider switching most of your portfolio to debt funds to lower your risks. Conversely, if there is a boom in the market, you may switch back to more equity funds to scale up your investment. 

For instance, let us suppose that you begin your ULIP investment journey when you are young and earning well:

1. You can invest the entire amount into equity to grow your wealth.
2. Once you marry, have a child, you may switch more towards debt funds.
3. Once you start planning for your child's higher education and other future goals, you may have the remainder in debt funds with some in equity.

Why fund switching in ULIPs is beneficial 

• You can constantly personalize your investment based on your life stage, evolving goals, and risk appetite 
• You can minimize your risks by switching to other funds depending on market conditions
• You can maximize your returns by switching more towards high-performing funds when the market is doing well
• You can always keep syncing your investment portfolio with your financial and life objectives

Most companies will allow a finite number of free switches per year. After that number is exhausted, a nominal charge (that varies from insurer to insurer) may be levied on fund switches. On the other hand, some insurers also provide unlimited free switches in a year.

You should keep tracking your ULIP funds and their performance regularly. It is always possible to enhance returns from ULIPs by using the option for fund switching. If you are not well-versed in financial markets, do not hesitate to ask for professional guidance from your fund manager in this regard. While self-service facilities are often available, in some cases, fund managers may recommend switches to tap into favorable market conditions.