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How to invest in ULIPs if you are risk-averse

When it comes to wealth creation and accumulation, one should consider opting for a well-designed investment plan. Traditional market investment is not the only way for one to grow their wealth. There are different options that you as an investor can take advantage of. One such option that is easily available to you is a ULIP plan.

While ULIPs have different plans and options for everyone, there are many who look at them as a risky investment. As many people have a lower risk appetite, they do not consider a ULIP as an investment option. If you are someone who is considering investing in  a ULIP yet are cautious about the risks of it, here’s how you can still opt for it with minimal risk possible.

What is a ULIP policy?

A ULIP is a type of life insurance policy in which the policyholder gets to enjoy the dual benefits of investment and insurance in the same policy. In the investment part, you get to invest in equity funds, debt funds, and balanced funds. Based on your risk appetite and requirement, the investment shall be done accordingly.

The family of the policyholder gets financial protection from life risks with the help of life protection cover. In the event of the policyholder’s untimely demise during the policy term, the insurer compensates the family of the policyholder with a death benefit. This amount can help them manage vital expenses while staying financially stable at the same time.

What are the risks associated with ULIPs?

While there is a general perception that there are many risks associated with ULIPs, however, the risk is limited to just one thing: investment. When it comes to investing in a plan such as a ULIP, you have the option of investing in equity funds, debt funds, and balanced funds. Debt funds have a low-to-medium risk factor and provide medium returns on the investment. This makes them the safer option to invest in.

However, equity funds offer greater returns compared to debt funds. They also, however, have a higher risk factor due to the nature of the investment and the exposure to market risks. If your aim is to earn greater returns quickly, this is the fund you can go for. However, there is no guarantee that the returns would be consistent.

How to avoid risks in ULIPs?

A beneficial feature of ULIPs is that you can adjust your investments as per your risk appetite. It can be carried out in the following ways:

1. Opt for a debt plan

There are different plans when it comes to ULIPs. Among them is a debt plan, which as the name suggests, lets you invest purely in debt funds. When you opt for debt funds, your money is invested in government securities and bonds, corporate bonds, and other types of debt securities. Due to the lower risk factor of this fund, your investments do not get heavily impacted because of market fluctuations. This keeps your investment intact and returns consistent to a certain extent.

2. Go for balanced funds

Instead of investing in just one fund, you have the option of investing in both equity and debt funds. This is known as balanced funds. In this, the money is allocated in each fund as per your instruction. For example, you can choose to invest 60% in debt funds and 40% in equity. Balanced funds have a medium risk factor and provide medium returns on the investment.

3. Switch your investment

An advantage that you get in this policy is that of switching your investment. You can switch your investment from one fund to another, which helps your investment in adjusting to the market volatility. This option is beneficial when your life goal changes at a different stage. For example, the majority of your investment may be in equity when you are a single individual. However, once you have a family, you would want to switch the investment to debt for consistent returns; this can be done with the help of switching.

You can either do the switching by yourself, or the fund manager could do it for you as well. Similarly, you have the option of automatic switching. In this, the switching is done at different stages of life from equity to debt automatically.

These are the steps that you can take to avoid risk exposure when investing in ULIPs. Before you invest in one, you can use the ULIP calculator to see how much investment is required and the returns based on that.

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