4 Go-to Ways of Portfolio Management in ULIPs

2024-08-02

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ULIPs, or Unit Linked Insurance Plans, are versatile wealth-building options from life insurers. ULIPs pack a punch when it comes to investing and allow investors to create and manage their multi-asset portfolios. ULIPs are one of the rare investment options which can fulfil all three objectives of investment through a single investment plan:

Wealth creation
Wealth preservation
Wealth distribution

Inbuilt portfolio management features of ULIPs help you achieve these three objectives, especially the wealth creation goal. But, why do you need a portfolio management strategy? How is it different than investing in a single instrument? Wouldn’t it be better if we can invest in one place and simply hold for a long time?

Why Portfolio Management?

Viren and Hema are colleagues working and earning almost the same amounts. Their savings and investments are also identical – 50:50 equity and debt investments. However, there is one key difference:

Hema keeps an eye on her investments and reallocates money to equity when markets are looking down and vice versa.
Viren on the other hands doesn’t like to spend much time with his investments. He simply invests 50% of his savings in equity and 50% in debt funds.

In steady equity markets, both portfolios of both Hema and Viren would look almost identical. But, when the markets see a downtrend and then regain upward movement, Hema’s portfolio will see better gains than Viren.

This is simply because Hema readjusted her portfolio to the changing risk scenario in the equity market. She moved some money to equity funds from her debt holdings and when the markets recover; her equity portfolio would register more gains.

After the gains she will again readjust the portfolio to bring the debt-equity ratio back to 50:50; i.e. transferring the gains from equity markets to safer debt investments. This is why you need portfolio management. In short, portfolio management will help you:

Maintain your portfolio risk as per your risk appetite
Take adequate advantage of market movements

Remember your rate of return on investment is a result of the risk in the investment. The higher the risk, the higher the return on investment. But, you need to keep your portfolio’s risk as close to your comfort level as possible.

If your portfolio risk is too low, your investment growth will suffer. If it’s too high, your peace of mind will suffer and so the chances of loss will increase.

Therefore, balancing your portfolio risk-return profile is the key to long-term success with investments. This is what portfolio management will help you achieve.

Portfolio Management in ULIPs

If investment management is not something you want to do full time, you need to consider automating most of your investment transactions. While you can easily automate investing by allowing auto-debit from your bank account, automating portfolio management could be difficult.

But, with ULIPs like Invest 4G plan from Canara HSBC Life you can automate even the portfolio management. Invest 4G offers you four different portfolio management strategies to manage your asset allocation.

The best part is despite the automation you can have full control over your portfolio and intervene when you see the opportunity. You can also change the strategy within the policy duration.

But, once you choose a portfolio strategy, the plan will automatically manage and adjust your asset allocation regularly. This is why ULIPs can be your personal portfolio manager.

Portfolio management in ULIPs can help you tackle the market risk and exploit the market opportunities with minimum involvement.

Portfolio Management Strategies in Invest 4G Plan

Invest 4G ULIP plan from Canara HSBC Life offers four different strategies to manage your portfolio:

Systematic Transfer Strategy –

Systematic transfer means a gradual flow of funds from one asset to another. In the case of Invest 4G plan, the money is moved from liquid fund to an equity fund.

Why Systematic Transfer?

The systematic transfer allows your lump sum investment into the plan to benefit from rupee cost averaging while getting into the equity funds. Rupee cost averaging means you receive more units when the markets are low and lesser units when markets are high. Thus, reduce your average cost of units in the fund.

How does it work?

When you invest your funds in the plan, your entire investment is saved in a liquid fund. Every month the plan will liquidate 12th part of total allocated units (in the beginning) and then use the funds to purchase equity fund units.

When to Use?

If you do not want to invest in monthly mode, you can use this strategy to create the rupee cost averaging for your equity allocation.

Return Protector Strategy –

Money is transferred from equity funds to debt fund. This transfer is not systematic but depends only on the gains of equity fund allocation. Once the fund value grows to a set threshold, the gain is moved to a debt fund.

Why Return Protector?

Return protector helps you collect your gains from the equity funds. But does not increase your risk when equity markets don’t perform well. This strategy will gradually reduce your equity fund allocation and thus, your portfolio risk.

How does it work?

You can fix a return percentage for your equity fund allocation between 5-10%. The moment your equity fund allocation gains 5% (the fixed return value) the profit will be booked and transferred to debt fund.

When to Use?

If you want your portfolio risk to go down as you age, this strategy is perfect.

Auto Fund Rebalancing Strategy –

This strategy works on a fixed asset allocation ratio. Once you fix the ratio of equity, debt and liquid assets in your overall portfolio the plan will adjust your allocation every three months to match the ratios.

Why Auto Rebalancing?

Auto rebalancing achieves the dual objective of keeping your portfolio risk stable while exploiting the market opportunities. Thus, you can consider this strategy the better of the three for wealth accumulation goals.

How does it work?

You fix the allocation ratio for debt, equity and liquid funds, say 50:30:20, or distribute only between equity and debt. The plan will revisit the allocation every three months and readjust the asset allocation to the decided ratios.

For example, after three months your allocation changes to 55:28:17. The plan will liquidate the gains in equity funds and distribute it to debt and liquid funds.

When to Use?

This strategy is great when you have 10+ years to stay invested and build your corpus. It works better for wealth creation goals and long-term financial goals.

Safety Switch Strategy –

This strategy simply helps you save your accumulated corpus from market volatility in the final 4 years of your policy. The plan will gradually move your entire holding to liquid funds systematically over 4 years.

Why Safety Switch?

The safety switch option protects your accumulated corpus from market fluctuations as you close in on your financial goal. You can use this strategy with the other three strategies to ensure your gains on the high-risk allocations remain safe near the maturity.

How does it work?

In the last four policy years, the plan rebalances the portfolio at the beginning of each year. The rebalancing ensures that liquid funds allocation matches the scheduled weightage of 30%, 60%, 90% and then 100% for the last 4 policy years.

When to Use?

You can use this strategy with any of the other three strategies. If you use this strategy, in the last four policy years, only this strategy will be active.

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