When your objective is wealth creation, relying purely on savings and deposits is not an option. The returns from them are quite low and will not give you the kind of returns you require to grow your wealth. There are different types of instruments that offer you a choice of safer investment. One such instrument is ULIP plan.
While ULIPs have been around for a while, many investors have started to give it preference due the kind of returns it offers. These returns are based on the type of investment that you do. What are the different types of funds you can invest in ULIPs? Which is more suitable for you? Read more to find out.
What is a ULIP?
A ULIP is a type of life insurance policy that provides the dual benefits of investment and insurance under the same policy. When you invest in ULIPs, you get to invest in equity, debt, and balanced funds. The type of investment you make is based on your risk appetite and life goals you want to accomplish.
The policy provides life protection cover to your family. If you were to pass away during the policy term, the insurer would financially compensate your loved ones with a death benefit. This amount will help stay financially afloat, especially during emergencies.
What are the types of funds?
The following are the types of ULIP funds that you should know about before investing:
- Equity funds
Investing in equity funds basically means investing in the stocks of listed companies that are offered by your insurer. The funds could be classified as small-cap, mid-cap or large-cap funds depending on their market value. Equity funds carry a high-risk factor due to the nature of their investment as the equity market is highly volatile. Fluctuations in the market will impact your investment, however, high returns are also expected when invested in equity funds.
- Debt funds
Debt funds, also known as fixed income funds, offer fixed income in returns to the investor. When you opt for debt funds, the money is invested in government securities and bonds and corporate bonds. This fund type carries a low-to-medium risk factor due to the nature of its investment. Because of this, the returns are medium and remain consistent irrespective of the market fluctuations.
- Liquid funds
When you opt to invest in cash funds or liquid funds, your money gets invested in investment options known as liquid investment. This includes money market funds, bank deposits and cash deposits. This fund type carries a low risk factor, but also offers lower returns compared to other fund types.
- Balanced funds
Balanced funds are the safest investment option in ULIP as it invests in both equity and debt funds. Such an investment means that you can get high returns from the equity funds but are also guaranteed fixed and steady returns from debt funds. When you opt for balanced funds, the money gets invested into equity and debt fund based on your allocation.
How to select the correct fund?
When you are looking to select the right type of fund for investment, consider what your objective is. If you are:
- Looking for higher and quick returns, you should opt for equity funds. As the risk factor is higher in them, people with a higher risk appetite opt for equity funds. However, do keep in mind that any type of fluctuation in the market could have either a positive or negative impact on your investment.
- Looking to plan the future of your children or your dependents, you can either go for debt funds or balanced funds. The risk factor in debt funds is low compared to equity; in balanced funds, the risk factor is balanced. Both funds provide consistent returns in the longer run.
- Looking to plan financially safe retirement, you can go for liquid and balanced funds. Liquid funds have a low risk factor and provide steady returns that could help you with retirement.
These are the types of funds that you can invest in when it comes to ULIPs. To know more about ULIP benefits, you can get in touch with your insurance advisor.
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