What are ULIPs and their Types?

A Unit-Linked Investment Plan, commonly called ULIP, is a great investment option since it mixes insurance and investment. A part of the premium amount provides you with insurance coverage, while the remainder is invested in the stock market. Because a portion of the premium is constantly invested in the stock markets over time, the potential for returns is substantially higher than with other investments.

There are different types of ULIPs in India to suit a variety of financial goals and risk profiles. In general, ULIP plans are categorized according to the types of funds in which your premium is invested or their ability to build wealth.

The most popular types of ULIPs in India are briefly described here:

Based on the types of funds

1. Equity

Investors’ money is used to buy equity shares. Since investments in equity are directly linked to financial market changes, they prove to be highly risky. However, the potential for expansion is comparatively larger. Therefore, ULIP plans that invest in equity are appropriate for risk-friendly investors with a high-risk tolerance.

2. Debt

Debentures, corporate or government bonds and securities, and fixed income bonds are among the debt instruments in which the funds are invested. Though these instruments have a medium to low-risk profile, they also include a moderate return profile.

3. Liquid Funds

These ULIP plans are ideal for reaching short-term financial goals since they invest in highly liquid money market products. These funds have a shorter maturity period (from weeks to months). Most of these ULIP investments have high credit ratings, making them a safe investment option for those with a low-risk tolerance profile.

4. Balanced Funds

Some ULIP plans invest in a combination of equities and debt assets to reduce risk. The risk is effectively spread across high-risk and low-risk investment avenues by allocating a part of the amount to equity and the other part to fixed-income debt instruments.

5. Cash Funds

These funds are invested in very low-risk cash fund instruments. While the profits are the lowest of all the available possibilities, the risk is also the smallest, making them an excellent alternative for risk-averse investors who aim to reduce risk as much as possible.

Based on wealth creation

1. Single premium and regular premium ULIPs

The former requires only a single premium payment at the time of purchase. On the other hand, the latter permits you to pay premiums regularly throughout the plan’s life, from purchase through maturity.

2. ULIPs for different stages of life

These are based on the premise that the risk-taking ability of investors decreases with their age. Therefore, a portion of the premium paid is invested in equity securities, while the rest of the amount is invested in debt instruments.

3. ULIPs with and without guarantees

Guaranteed ULIPs are concerned with capital preservation. By investing a small amount of the premium in equities, they restrict the exposure to market risk. However, non-guaranteed ULIPs are designed to maximize wealth creation by enabling an investor to invest a larger amount of their premium in the financial market. As a result, non-guaranteed ULIPs have higher returns, but they are more volatile.

These categorizations convey that you can pick a ULIP plan that meets your risk tolerance and long-term financial objectives. In addition, you can invest in a ULIP plan, which allows you to pick from various funds with varied risk and reward formulae. As a result, make informed decisions and take advantage of market fluctuations.