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Four Kinds of Portfolio Creation Strategies Offered by ULIP Plans

Today, many people in India prefer investing in market-linked financial instruments rather than traditional schemes like FDs and bank savings accounts because these schemes offer better returns and tax benefits. Besides, some financial instruments provide tax benefits, high returns potential and insurance protection. One such instrument is ULIP or Unit Linked Insurance Plan.

What is ULIP?

ULIP is a unique financial instrument that offers dual benefits of insurance and investment. While it is primarily a type of life insurance policy, it also allows you to invest in the money market and accumulate wealth in the long run. Like other life insurance policies, you must pay the premium as per the policy terms and conditions. However, the only difference is that in ULIP, the insurer uses a part of the premium for insurance protection and the remaining amount to invest in different asset classes of your choice.

The investment component in a ULIP plan helps you align your investments with your financial goals as per your changing risk tolerance levels during the policy term. With features like fund switch, you can even switch your investment from one fund to another to maximise the returns potential.

Portfolio strategies offered by ULIP plans

Knowing how the ULIP portfolio can help you identify and choose the best strategies to make the most out of your investment in ULIP. Typically, there are four commonly used strategies.

Strategy 1

ULIP portfolio strategy based on triggers

Using this ULIP portfolio strategy, you can benefit from the price movements in the equity market. Some of the essential highlights of this ULIP portfolio strategy include

  • As per this strategy, you must buy low and sell high
  • The ideal investment distribution ratio in equity to debt funds must be 75:25
  • As per the ULIP portfolio strategy based on triggers, your fund manager will readjust your portfolio when the trigger events occur
  • The trigger events are usually 15% price movements in the equity investments
  • If any trigger events occur, you may see an increase in the equity component of your portfolio

Strategy 2

Portfolio wheel of life

The wheel of life portfolio strategies is specifically designed to help you leverage the high returns potential in the equity market when you start your investment journey and can afford to take high risks. The highlights of this strategy include

  • You must first invest 100% of your funds in the equity instruments
  • The equity aspect of your portfolio could include investments in different equity-related funds like mid-cap funds, large-cap funds, etc.
  • As the maturity date of the policy gets closer, the exposure to equity investments decreases, and it is redirected to more stable assets like debt funds, liquid funds and bonds that provide assured and stable returns
  • The stable equity investments like the blue-chip funds are prioritised with the balance equity segment
  • When the policy matures, all the investments are allocated to debt, and you have zero exposure to equity instruments

Strategy 3

Automatic transfer of portfolios

The automatic transfer of portfolios strategy allows you to get valuable returns by taking moderate risks through systematic asset diversification. The highlights of this strategy include

  • During the initial years, a significant portion of your premium allocated to investment is applied to low-risk funds like liquid funds and bonds
  • The portfolio manager will switch a particular percentage of your investments to other funds at the start of the month as per your specifications, risk appetite, and financial goals you want to accomplish over a period

Strategy 4

Investor selectable portfolio strategy

This strategy gives you complete control over investments. As the name implies, under this strategy, you can select your asset allocation. Some of the highlights of this strategy include

  • You can invest all your money in one fund or distribute it among debt and equity funds.
  • You can choose from very high-risk to very low-risk funds based on your risk-taking ability and the expected returns
  • Based on your changing risk-taking capacity and market movement, you can adjust your asset allocation anytime during the investment period

Final Word

Now that you know the different ULIP portfolio creation strategies, use the right strategy to maximise the returns from ULIP.

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