So, you have just decided to purchase a unit-linked insurance policy. You would have taken your time to do your need analysis, and then zeroed in on your insurance plan. But, have you spent time to decide on the fund in which the monies will be invested?
This decision is equally critical, as the returns and the safety will be linked to this decision. It is also recommended to keep reviewing the funds on a periodic basis.
The funds can be categorized into 4 types:
Aggressive Funds: The equity component will be greater than 80% of the corpus, and the rest will comprise of government securities and debt instruments. These funds will tend to give higher returns over a period, but the returns will be linked to the movement to the equity market, and can be varying.
Prudent Funds: The equity component will be greater than 40%, and lower than 80%, and rest will comprise of government securities and debt instruments. The returns will be more stable, but the yields will likely be lower than aggressive funds over a longer time period.
Conservative Funds: The equity component will be lesser than 40%, and government securities & debt instruments will form a sizable chunk of the investment corpus. The returns will be stable, and more predictable.
Special Funds: These will be guarantee funds or thematic funds, and these will be out of purview of our viewpoints.
The common fund names used in the industry are as follows:
This decision is equally critical, as the returns and the safety will be linked to this decision. It is also recommended to keep reviewing the funds on a periodic basis.
The funds can be categorized into 4 types:
Aggressive Funds: The equity component will be greater than 80% of the corpus, and the rest will comprise of government securities and debt instruments. These funds will tend to give higher returns over a period, but the returns will be linked to the movement to the equity market, and can be varying.
Prudent Funds: The equity component will be greater than 40%, and lower than 80%, and rest will comprise of government securities and debt instruments. The returns will be more stable, but the yields will likely be lower than aggressive funds over a longer time period.
Conservative Funds: The equity component will be lesser than 40%, and government securities & debt instruments will form a sizable chunk of the investment corpus. The returns will be stable, and more predictable.
Special Funds: These will be guarantee funds or thematic funds, and these will be out of purview of our viewpoints.
The common fund names used in the industry are as follows:
Fund Type | Equity Component | Common Names of the Funds |
Aggressive | > 80% | Large Cap, Equity, Aggressive, Growth, Maximizer, Opportunities, Frontline Equity, Enhancer |
Prudent | > 40%, < 80% | Balanced, Creator, Secure, Vantage, Flexi, |
Conservative | < 40% | Bond, Debt, Money Market, Protector, Defensive |
Special | N.A | Highest NAV Guarantee, PSU, Dynamic |
Most unit-linked insurance plans allow you to allocate your monies in multiple funds, and also to periodically switch your monies between your various funds. These features should be used very effectively to maximize your returns.
The investment decision is a function of the risk appetite of the policyholder, and the policyholder is also advised to remember the financial rule of ``High Risk, High Gain``, which means that investors looking for higher returns will invest in securities with higher volatility, and the investors looking for safety in investment will invest in securities will lower returns. A policyholder looking at higher returns will invest in aggressive funds, but the returns will be linked to the returns on the equity market. A policyholder looking for returns as well as safety will invest in prudent funds, where the returns will be lower but with greater safety than aggressive funds. A policyholder giving higher weightage to safety will invest in Conservative funds, wherein the safety is very high, but the returns will be low. The policyholder is advised to base his/ her investment decision on his/ her risk appetite, and also take advice from his/ her financial counselor. The parameters mentioned below can also act as guiding principles, and the policyholder is advised to use his/ her individual discretion before selecting the fund.
The key parameters advised for fund selection are:
> Insurance Plan Type
> Age of Entry
> Policy Tenure
> Market Conditions at Entry
> Policy Term Remaining
Let us understand each of these parameters in depth, and see how they impact the fund selection advisory.
Insurance Plan Type: The three types of insurance plans are Pension plans, Child plans & Investment plans. In pension plans, it is recommended to invest in prudent funds, if the policy tenure is more than 20 years, and in Conservative funds, if the policy tenure is less than 20 years. This fund selection is recommended as the policy holder will be building up a corpus for his/ her post retirement life, and it is recommended to avoid taking aggressive decisions regarding investment for this insurance plan. In child plans, as the policy tenure is limited to a maximum of 25 years, and the purpose is to build a corpus for the child`s future, it recommended to invest in Prudent Funds. In Investment plans, the policy holder should invest in Aggressive Funds and Prudent Funds, in a ratio which would be comfortable to the policyholder, and it should be accompanied by regular monitoring of market movement.
Age of Entry: The policyholder`s risk taking ability is a function of the age of the individual. A younger individual (age less than 35 years) would prefer to invest in aggressive funds, a middle-aged individual (age between 36 years and 45 years) would prefer to invest in prudent funds, and an older individual would prefer to invest in conservative funds.
Policy tenure: Unit-linked insurance plans are generally up to 25 years tenure, except the pension plans, which are longer. In longer policy tenures (tenures greater than 15 years), the policy holder can invest some monies in the aggressive funds, but for shorter policy tenures, the policy holder is advised to invest in prudent/ conservative funds.
Market conditions at Entry: The investment in an insurance plan is over a longer period, and hence the market conditions at the time of opting for the insurance plan become relatively less important factor. Policyholders are advised to avoid timing the market, as the investment returns tend to average out over the policy tenure. Hence, this should not be a factor in the fund selection. Also, most insurance plans allow deferment of maturity benefit, wherein the policyholder is allowed to keeps funds with the Insurer for up to 5 years after maturity, in case the policy holder feels the market conditions are not favorable at maturity.
Policy tenure remaining: This is an important parameter for return maximization, and the fund switching facility should be used for this purpose. Your investment gains over the policy tenure have to be protected, and this can be achieved by shifting your corpus to Prudent/ Conservative Funds in a phased manner in the last 5 years of the policy term. This feature is called as fund conservation, and is now being offered in certain unit-linked insurance plans.
On the basis of these five parameters, the policy-holder should evaluate his/ her investment objective and select the funds accordingly. There can be no single rule which can be used by the policy holders, these parameters mentioned above can act as guiding principles to zero in on fund selection, which will only help in maximizing the returns for the policy-holder.
The investment decision is a function of the risk appetite of the policyholder, and the policyholder is also advised to remember the financial rule of ``High Risk, High Gain``, which means that investors looking for higher returns will invest in securities with higher volatility, and the investors looking for safety in investment will invest in securities will lower returns. A policyholder looking at higher returns will invest in aggressive funds, but the returns will be linked to the returns on the equity market. A policyholder looking for returns as well as safety will invest in prudent funds, where the returns will be lower but with greater safety than aggressive funds. A policyholder giving higher weightage to safety will invest in Conservative funds, wherein the safety is very high, but the returns will be low. The policyholder is advised to base his/ her investment decision on his/ her risk appetite, and also take advice from his/ her financial counselor. The parameters mentioned below can also act as guiding principles, and the policyholder is advised to use his/ her individual discretion before selecting the fund.
The key parameters advised for fund selection are:
> Insurance Plan Type
> Age of Entry
> Policy Tenure
> Market Conditions at Entry
> Policy Term Remaining
Let us understand each of these parameters in depth, and see how they impact the fund selection advisory.
Insurance Plan Type: The three types of insurance plans are Pension plans, Child plans & Investment plans. In pension plans, it is recommended to invest in prudent funds, if the policy tenure is more than 20 years, and in Conservative funds, if the policy tenure is less than 20 years. This fund selection is recommended as the policy holder will be building up a corpus for his/ her post retirement life, and it is recommended to avoid taking aggressive decisions regarding investment for this insurance plan. In child plans, as the policy tenure is limited to a maximum of 25 years, and the purpose is to build a corpus for the child`s future, it recommended to invest in Prudent Funds. In Investment plans, the policy holder should invest in Aggressive Funds and Prudent Funds, in a ratio which would be comfortable to the policyholder, and it should be accompanied by regular monitoring of market movement.
Age of Entry: The policyholder`s risk taking ability is a function of the age of the individual. A younger individual (age less than 35 years) would prefer to invest in aggressive funds, a middle-aged individual (age between 36 years and 45 years) would prefer to invest in prudent funds, and an older individual would prefer to invest in conservative funds.
Policy tenure: Unit-linked insurance plans are generally up to 25 years tenure, except the pension plans, which are longer. In longer policy tenures (tenures greater than 15 years), the policy holder can invest some monies in the aggressive funds, but for shorter policy tenures, the policy holder is advised to invest in prudent/ conservative funds.
Market conditions at Entry: The investment in an insurance plan is over a longer period, and hence the market conditions at the time of opting for the insurance plan become relatively less important factor. Policyholders are advised to avoid timing the market, as the investment returns tend to average out over the policy tenure. Hence, this should not be a factor in the fund selection. Also, most insurance plans allow deferment of maturity benefit, wherein the policyholder is allowed to keeps funds with the Insurer for up to 5 years after maturity, in case the policy holder feels the market conditions are not favorable at maturity.
Policy tenure remaining: This is an important parameter for return maximization, and the fund switching facility should be used for this purpose. Your investment gains over the policy tenure have to be protected, and this can be achieved by shifting your corpus to Prudent/ Conservative Funds in a phased manner in the last 5 years of the policy term. This feature is called as fund conservation, and is now being offered in certain unit-linked insurance plans.
On the basis of these five parameters, the policy-holder should evaluate his/ her investment objective and select the funds accordingly. There can be no single rule which can be used by the policy holders, these parameters mentioned above can act as guiding principles to zero in on fund selection, which will only help in maximizing the returns for the policy-holder.
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