Risks Associated with ULIP Investment and How to Mitigate Them

Risks Associated with ULIP Investment and How to Mitigate Them 1

Unit-linked Insurance Plans (ULIPs) are a unique product that offers the dual advantages of life cover and investment returns. A certain portion of the premium gets deducted as ULIP charges. The majority receives invested in different fund options, such as debt, equity, or both funds. Because a specific sum is invested in market-related products, there are risks when choosing a ULIP. However, the risk linked with a particular ULIP depends on the fund you invest ine ways to control the risks associated with ULIP investments:

  1. Invest for a longer period.

ULIPs have a minimum lock-in period of five years, during which you cannot discontinue the policy. It would be best to hold your investment for a duration exceeding this five-year lock-in to mitigate market-related risks and earn higher returns. Historically, it is seen that when you invest in equities for a longer term, you can make higher returns. Therefore, choosing a ULIP that supports most of the corpus in equities and some debt part can balance your ULIP investment and reduce the risk.

  1. Switch between funds to ride out market volatility.

Insurance companies allow you to move your investments from one fund to another without tax implications. It is convenient to protect your money during market volatility and maximize returns through balanced investment between equity and debt funds. Consider your risk appetite, financial objectives, and market conditions before switching from one asset class to another.


If you predict a fall in the stock market, you may want to switch to debt funds. Once the call is stable and recovering, you can return your money to equity funds. You can also move most of your corpus to debt funds as the policy approaches the maturity date or if a long-term financial goal is approaching soon. This mitigates the risk due to unfavorable market movements and secures your corpus. Additionally, you earn maximum returns at the time of withdrawal.

  1. Automatic switching

If you are not financially savvy or do not know financial markets, you can choose the automatic asset allocation option provided by the insurance company. Experienced fund managers will invest your money in different asset classes based on age, financial goals, and risk-taking capability. Some insurance companies provide an automatic investment facility. When you choose this option, the corpus automatically switches from high-risk investments to low-risk products based on your age and the balance investment time. This is a good way to mitigate your risk of ULIP funds and maximize the returns.

  1. Diversified portfolio

You may have heard the saying, “Do not put all your eggs in one basket.” Similarly, it would help if you chose multiple asset classes to invest your money in. It would be best to diversify your ULIP equity and debt funds investments. Doing this will balance the returns by offsetting potential loss from one type of investment with the other asset classes’ earnings.

Several insurance companies offer different types of ULIPs. It is essential to compare the historical ULIP performance to make an informed decision. While researching, check asset allocation and charges like administrative, premium allocation, fund management, and mortality costs, as they affect your overall returns.

ULIPs are an excellent product for your investment portfolio due to their versatility, double benefits, and tax advantages. However, ULIP performance is market-related, so it is important to study the different options in detail to make the right choice.

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