ULIP fund types and switches

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Fund types and free switches.

Why the choice of right fund and Switching between the funds is important in ULIP.

All ULIP plans provide number of fund option to choose (See below table for eg).

Fund type

Return

Risk

Growth

High

High

Balanced

Moderate

Moderate

Secure

Low

Low

A growth fund will have an aggressive way of investing the money primarily in equities with ultimate aim of yielding a very high return but at the same time it is very risky.

More suitable during younger age and for those who believe in taking risk?

A Balanced fund will try to give moderate return with moderate risk on your investment. Here very little money is invested in equity and rest is invested in Government security, corporate debt and bonds.

More suitable for people who are satisfied with moderate return and are not interested in taking high risk.

Secured type of fund is primarily focused on Low risk and hence portfolio of such fund is mainly in government securities and bonds.

This is more suitable for people who do not want to take risk on their money.

Most of the Insurers provide option to select fund with portfolio structure similar to described above with different names.

Most of the young investor (between age 25 – 35) normally chooses Growth fund as this provides high return and they are ready to take risk.

It is always advisable to switch funds based on

1) Market condition and

2) Your risk taking capacity.

let us see how free switches can save their money.

What are Switches?

Switches are a way where in investor move their units from one fund option to another.

For eg: 300 Units of Growth fund (NAV 30 Rs) moved to Secured fund(NAV 15 Rs).

After switching the investor will have 600 units.

Suppose market is zooming (The way it did till Jan-2008)

Mr X and Mr Y who both are of age 35 years invest Rs 1, 00,000 (Single premium)in one of the very famous ULIP plan of top insurer for a term of 20 years in the growth option.

The NAV at that time is 10 Rupees (both Balanced and Growth Fund).

For the sake of simplicity we will not consider the deduction because of various ULIP charges.

Both will receive total 10000 Units.

After 5 years NAV is 25 rupees (15 Rupees for balanced fund) and hence both are happy with their investment is worth 2.5Lack rupees now, more then double in only five years.

But none of them is in need of money and hence they keep their money invested.

Suddenly somewhere in the world some thing called
”Sub Prime crisis” started impacting worlds largest economy.

Although Both Mr X and Mr Y are well educated and are aware of all kind of global trends only Mr. X decides to switch the money from Growth fund to Secured fund.

At that time market has started reacting and NAV is down to 17 Rupees for Growth and 12 Rupees for Secured fund.

Now Mr X holds 14167 units of Secured fund and Mr Y still holds 10,000 units of Growth fund (Both Valued at 170,000 Rupees).

Due to greater impact of crisis Growth fund’s NAV at the end of 8th year is 12 Rupees and Secured Fund’s NAV is 11.50 Rupees. Now value of Mr X’s investment is 162920.5 Rupees while Mr Y’s worth is 120000.

So at the end of 8th year we can clearly see that by keeping money in riskier instrument how Mr. Y is beaten harder then Mr. X

By the end of 10th year things have started settling down with NAV of Secured fund at 12.50 and NAV of Growth fund at 15 Rupees Mr X decides to come back to Growth fund.

His worth with Secured fund is 177087.5 Rupees while Mr Y’s worth is 150000 Rupees.

After Switching to Growth fund Mr. X now holds 11806 units.

Now assuming that every things works fine at the global as well as local level. At the end of 20th year NAV of growth fund is 50 Rupees.

Mr X will receives 5,90,300 compared to 5, 00,000.

A clear benefit of 90,300 Rupees!

In the second case suppose Sub prime crises had entered in to the scene at 18th year where your risk taking capacity is very low (not only because you are now 53 years old but also you have already created a descent profit) then it might have even reduced entire amount earned by you if you do not change to safer fund.

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