Investment School. Where ULIPs park their money

Unit-linked insurance plans (ULIPs) serve the dual purpose of insurance and investment, and provide returns on the investment sum over a period of time. But in what do ULIPs invest? How do they generate returns?

ULIPs work similar to mutual funds. They invest in a combination of equity and debt instruments and follow different strategies based on the investors’ risk appetite for maximum returns. Here is an overview of where ULIPs invest in, the fund options available and the strategies adopted by insurance companies.

Fund options

Your investment in a ULIP will appreciate/depreciate with the value of the instruments the ULIP has invested in. It could be stocks of companies, debt instruments or both. Some insurance companies invest the corpus of a ULIP in different funds based on the age of the investor and her risk appetite and goals. However, the common fund options are equity, balanced and debt.

Equity funds are those that primarily invest in the stock market and, hence, usually follow an aggressive investment strategy. That is, the risks are high in these types of funds, but so is the potential for high returns.

On the other hand, debt funds follow a conservative investment strategy and invest in fixed-income instruments and bond markets; usually, they are for low-risk investors. Lastly, balanced fund options are for moderate- to high-risk investors where the funds are invested in a mix of equity and debt instruments.

ULIPs of insurance companies such as Bajaj Allianz Life, ICICI Prudential Life and HDFC Life provide the option of selecting the type of funds based on your investment objective.

Say, your objective is capital appreciation, and if you don’t mind taking risks in equity, investing in a bluechip equity fund or pure equity fund is ideal. Such funds allocate nearly 90 per cent of your money to stocks and the rest to money market instruments such as treasury bills and commercial papers.

Consider HDFC Life’s Click2Invest ULIP. For investors willing to take risks, it offers fund options such as equity plus fund, bluechip fund and diversified equity fund, wherein the amount is parked in listed companies with strong financial positions. This means about 80-100 per cent of the investor’s money gets parked in equity, and the balance in money market instruments and fixed-income products.

Moderate- to low-risk investors can opt for bond funds, conservative funds or income funds offered by Click2Invest. Here 40-100 per cent from your kitty is invested in government securities and fixed-income products, and the rest in money market instruments that give stable returns.

Strategies

Almost all the insurance companies offer different strategies to suit the varying objectives of investors. Investment strategies help in diversifying fiunds across various funds and asset classes to minimise the risk in a portfolio.

Consider Bajaj Allianz Life’s Goal Assure. It offers four investment strategies — investor-selectable portfolio, wheel-of-life portfolio, trigger-based portfolio and auto-transfer portfolio.

If you opt for the wheel-of-life portfolio strategy, based on your age, your money gets spread among a bluechip equity fund, an equity growth fund and an accelerator mid-cap fund. In the trigger-based portfolio strategy, investors are protected from equity-market fluctuations; so funds are allocated between equity and debt, depending on the market movement.

Certain funds also have automatic asset allocation. They offer investors a pre-defined exposure depending on their age. This option is available in ULIPs such as Bajaj Allianz Life’s Goal Assure and ICICI Pru Life’s Elite Life Super.

You can also switch funds and/or strategies anytime during the duration of your investment, but note that charges might be attached.

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