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To invest in a ULIP policy and receive the full tax benefit under ULIP, you must understand the various types of funds available and how to invest money in them. Read on to know.
Commonly known as ULIP, a Unit-Linked Insurance Plan is a hit amongst people who want to make an investment option that would reward them with significant returns. This has led a lot of investors, both experienced and new, to pay attention to the ULIP plan.
While the awareness about ULIP and the trend towards ULIP plan investments are new, they have been around for a while now.
Let’s start with the basics of ULIP to understand what it is and how to compare ULIP plans and choose the best one for your needs.
A ULIP is a form of life insurance that combines the protection of life insurance with the potential for investment gains. A portion of your payment goes toward life insurance, while the remainder is invested in a pool of money that comprises market-linked assets like shares, debt, or a combination of both.
The percentage of your investment in the common pool is used to assign units to you. These units’ net asset value (NAV) is calculated on a daily basis. The NAV of these units grows and falls in lockstep with the market since they are linked to it. Therefore, it is usually recommended by financial experts to expand the ULIP investments so that the average NAV grows over time to reduce risk.
To invest in a ULIP policy and receive the full tax benefit under ULIP, you must understand the various types of funds available in a unit-linked insurance plan and how to invest in them.
Types of ULIP Funds
Equity funds invest in a range of company stocks in the hopes of growing their value. You may choose from large-cap, mid-cap, or small-cap funds to invest in. Equity investments are the riskiest of all, but they also provide the most lucrative returns. These funds are intended for those with a high-risk tolerance.
Such funds, also known as liquid or money market funds, invest in various highly liquid, low-risk, and short-term market instruments, including call money, cash deposits, market funds, treasury notes, commercial paper, and certificates of deposit (CDs), among many others. These funds with high credit scores are suited for you if you have a short investment plan and a low-risk tolerance. Nonetheless, the returns on such funds are similarly low.
Fixed-income assets, corporate bonds, government securities , and other safe financial assets are all part of the debt and income funds. These funds have a low to medium-risk profile and provide moderate but dependable returns. They’re perfect for those who have a low-risk appetite.
Balance funds are known to diversify the amount of money that flows to different places; hence, these are the most reliable and smart investments. It invests in proportion, dividing the entire investible amount among high-risk shares, business stocks, and other equity assets, as well as lower-risk fixed-interest instruments.
A variety of high, medium and low-risk investment possibilities are offered through ULIPs through several funds that are part of the same plan. You can choose an acceptable strategy depending on how comfortable you accept risks.
Before you purchase a product, you are informed of the fee structure, investment value, and estimated rate of return for the duration of the policy. Understanding the product in which you would be putting your hard-earned money is always a smart idea.
ULIPs assist you in developing regular saving habits, which is essential for amassing a corpus for future needs.
Section 80C of the Income Tax Act of 1961 exempts the policy’s premium payments from taxation.
To summarise, the ULIP plan provides a number of benefits, but the key to getting the most out of them is to choose the correct plan for you after you compare ULIP plans with other investing options. As a result, it’s critical to learn everything there is to know about ULIP and how to allocate money to funds accordingly.
ULIPs are the best option if you want higher profits than other insurance products. Due to their equity advantage, ULIPs provide greater returns than any other insurance product. ULIPs use several asset classes and numerous funds to invest the premium you pay in them.
A unit-linked insurance plan is an excellent investment at any time, just like mutual fund investments are. You can invest in ULIPs when the markets are up or down because they help withstand market volatility. The earlier you begin, the better because you can take advantage of compounding’s potential. Compounding is the process of continuously reinvesting your income to increase your wealth. You will be in a better position to gain from your investment the longer the time period over which you invest.
Each employer has a different minimum and maximum investment level for ULIP insurance. However, generally speaking, the minimum investment amount for a ULIP can be as little as ₹1,500 per month or ₹1,50,000 per year.
In this policy, the investment risk in the investment portfolio is borne by the policyholder.