6 Equity Investment Strategies in ULIP for Long-Term Growth

2024-08-02

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ULIPs offer the flexibility and features you need to build wealth in the long run. Unit Linked Insurance Plans like Invest 4G from Canara HSBC Life Insurance give you ample options to control the risk of your portfolio while investing in equity funds. This plan offers a life cover and has a variant that offers cover till you turn 100. Along with that the plan offers market-linked returns to assist you in achieving your life and financial goals. With Invest 4G, you have the flexibility choose from a bouquet of 8 different funds. Also, the plan provides multiple portfolio management options to optimize the returns as per your investment preference.

Here are six ways you can maximize your portfolio growth with equity funds using a ULIP.

1. Create SIP Regardless of your Investment Mode

Systematic Investment Plan is the best mode of investing in the equity markets. Investing a fixed amount regularly in a volatile market helps you lower your average cost and risk over time. The best frequency of SIP is the monthly mode of investment.

However, just in case monthly mode is difficult for you and you prefer once in a year investment, ULIPs have a solution for you. ULIPs like Invest 4G have the option of systematic transfer, which automatically creates SIP to your chosen equity fund.

How Does Systematic Transfer Work in ULIP?

When you invest a lump sum amount in your ULIP, you have a defined ratio of allocation to different funds. First, your premium is divided as per the defined ratio and the money allocated to equity funds is parked in a liquid fund.

Over the next 12 months, the amount parked in the liquid fund is transferred to equity fund with identical amounts going every month. Consider the following example:

You want to invest Rs. 2.4 lakhs a year into a ULIP, in a 50:50 ratio to debt and equity funds. Since you want to benefit from the SIP mode of investment into equity fund, you opt for a systematic transfer option in the ULIP.

The plan will park Rs. 1.2 lakhs in a liquid fund and invest the rest in a long-term debt fund. While the debt fund will continue unaffected, about Rs. 10,000 will be transferred from the liquid fund to the equity fund every month.

The transfers are made in such a way that at the end of the 12-month period your liquid fund balance becomes zero.

Thus, despite investing Rs. 1.2 lakhs once in the past year, you create a SIP of Rs. 10,000 every month.

2. Manage your Portfolio Risk Automatically

SIP is an effective way of minimizing your equity investment risk. However, as your portfolio grows, so does your overall risk.

For example, you may invest your premium in equal proportions into equity and debt fund, but after a few months, your overall portfolio will have a different ratio.

a) If debt performed better than equity market – Debt fund value > Equity fund value; i.e. Portfolio risk is lower

b) If equity markets performed well – Equity fund value > Debt fund value; i.e. Leading to higher portfolio risk.

c) If you wanted to maintain a 50:50 ratio of debt and equity portfolio, you will need to regularly liquidate the equity portfolio and invest in debt and vice versa. However, you might find this exercise a bit tedious along with your business or employment.

Thus, you should try and automate portfolio rebalancing using the features in ULIPs. The best unit-linked plans including Invest 4G give you the option of selecting a portfolio rebalancing strategy:

Return protection option
Auto fund Rebalancing
Safety switch option

3. Rebalancing in Return Protection Option

Return protector option helps you skim off the returns from equity markets.

For example, you can set your skim threshold for equity funds at 5%. Whenever the equity fund value grows by 5% over your invested value, the scheme will book the profits and invest the money into debt funds.

In the above case where you have invested Rs. 1.2 lakhs into the equity fund and your fund value grows to Rs. 1.26 lakhs. If you have chosen the RPO strategy, the scheme will liquidate equity fund units worth Rs. 6000 and deposit the money in a debt fund.

This strategy is great at reducing your risky portfolio over time. Due to consistent skimming at higher market levels your equity portfolio value keeps declining while your debt portfolio will keep growing. However, the strategy may not completely eliminate your portfolio risk.

4. Auto Fund Rebalancing

We have seen the example of auto fund rebalancing with a fixed 50:50 ratio above. If you choose this rebalancing option, the ULIP will rebalance your portfolio once every three months. Once again, the rebalancing happens by liquidating and transferring the money to the undervalued fund.

This strategy does not reduce your portfolio risk over time but maintains it. So, it is better to use the next strategy along with this, so that you can avoid the market risk as you approach maturity.

5. Safety Switch Option

This option comes into effect only in the last four policy years. The purpose of this option is to systematically withdraw your portfolio from the equity market and put the money into a safe asset.

Last four years, because before that you have time and you need growth. But as you approach maturity you should avoid risking your accumulated corpus.

6. Withdraw Systematically

The last but, perhaps, one of the most ignored strategies of equity investing is the withdrawal strategy. You should follow the same discipline while withdrawing from the equity investments that you followed at the time of investment. That is, withdraw systematically.

Systematic withdrawal ensures that you don’t miss on the recent market opportunities completely, while still lowering your investment risk. We have already discussed one strategy to systematically switch your funds to a safer investment option within the ULIP. But you can also withdraw from the ULIP using systematic withdrawal.

You can also use this option to build your post-retirement income after the age of 60. However, make sure your entire corpus has been moved to a fixed income fund in the ULIP before that.

Additionally, ULIPs are great for generating tax-free income, and if you can continue long enough, for tax-free estate transfer.

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