“My market-linked plan hasn't delivered what I expected. Is there a way I can manage the returns on my ULIP?” This is a common question amongst Unit Linked Insurance Plan (ULIP) customers.

a way out?

ULIPs do provide a variety of options to manage your returns due to market fluctuations. Fund switch option, the option to move your money from a pure equity plan to a debt or even hybrid plan, is one such facility by which you can manage your returns.

Fund switching can be carried out based on your risk appetite. Market savvy investors can also use the fund switching option to improve ULIP returns.

For those who may not have the understanding or time to track the markets, plans such as the Asset Allocation or Wheel of Life allow the fund manager to take the call.

Using switches

The fund switch option is a convenient way to protect their investments from market fluctuations and maximise returns by balancing the portfolio between debt and equity.

The switching of funds should be done considering your risk appetite, volatility of the stock market and your financial goals.

If you foresee a dip in the stock market, for instance, you should switch a large portion of your investment to debt/liquid funds, and switch them back into equity once the market picks up again. Such switches, however, can be difficult for lay investors.

As your policy moves towards maturity or you are approaching a milestone in life where you require money, such as child's education or daughter's marriage, you should move a maximum portion of your investment into safer debt/liquid funds.

This will ensure that a large corpus of the investment is secure and guarantees good returns at the time of maturity or a withdrawal.

Depending on the product, ULIPs may offer a certain number of free switches or unlimited switches in a year. ULIPs from Bajaj Allianz for instance, offer unlimited free switches throughout the policy term.

When to switch

Mr Singh, a 30 year-old earning individual has invested in a ULIP with a policy term of 30 years. He has opted for an all-equity fund. How should he manage his asset allocation?

Initially, Mr Singh can maintain 100 per cent of his investment in equities.

Say, after 5 years, as Mr Singh's financial responsibilities increase after marriage and children, it is recommended that he reduces his investment in equity by 20 per cent every 5 years by moving it into debt funds. By reviewing the investment every year and continuing to maintain this asset allocation, in the last five years, Mr Singh may have only 20 per cent of his investment in equity funds.

The accompanying table explains his equity-debt apportionment.

Policyholders can manage their fund switches through the self-service facilities offered by life insurers on their customer Web sites. Check with your insurer if they have secure translation process for changing the asset allocation on your ULIPs.

This is basically to protect the customer's interest and minimise misuse of the system.

Automatic switching

If you are not market-savvy or do not have the time to keep watch on the market, some ULIPs also offer an Asset Allocation fund or “Wheel of Life” portfolio strategy. In an Asset Allocation fund, the insurer's fund manager switches between equity and debt funds considering the view of the market. In the ‘Wheel of Life' strategy, the investment is managed in a pre-defined manner with automatic switches.

By opting for the “Wheel of Life Portfolio strategy”, the investor puts his asset allocation on an auto-pilot mode wherein the investment is gradually shifted to debt from equity keeping the investor's age and outstanding term in mind.

This optimises risk and returns based on the time horizon of the plan.

Studies have shown that if the asset mix is changed depending on market conditions, one can insulate oneself from market volatility to a certain extent.

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