Investments and insurance are the two main legs of financial planning. While one is required for wealth accumulation, the other one is required for coping with crises. However, there is one investment instrument that offers both the benefits that are capital appreciation and insurance protection at the same time, and that is ULIP. If you have invested in ULIPs, you do not need to intervene much about the insurance part, while for the investment portfolio, you need to be a little aware and rebalance it for better returns.
Unit Linked Investment Plan (ULIP) invests the premium you pay for the plan in equity or debt instruments as per your choice. So, you have the freedom to choose the asset class you want to invest in with ULIP. Rebalancing the ULIP fund portfolio means allocating the fund in either equity or debt per your risk appetite, financial goals, and market conditions. Suppose you started with equity investments for higher returns when you purchased the ULIP plan. However, over the years, your investment goal has changed, and also the market has become volatile, so you want to invest in debt funds for better security and stable returns. This is a rebalancing of the ULIP portfolio that is to align the ULIP portfolio as per risk tolerance, financial aspirations, and market scenario.
While fund houses offer a switching option for rebalancing your ULIP portfolio multiple times in a year, you should only use it wisely when required. Firstly, you need to understand whether your risk appetite has been the same or not, as risk-appetite changes over time. You may have started your ULIP in your 20s, and now when you are in your 40s, your risk appetite must have changed. So, you need to rebalance your ULIP portfolio accordingly. When people are young, they can take more risks and thus start ULIP investments with equity funds, while over time, the risk appetite reduces, and thus, it is wiser to shift to debt funds gradually.
Another scenario when ULIP rebalancing can be beneficial is when the interest rate changes. If the interest rate falls, then debt funds will yield higher profits and if your returns from ULIP funds which have more equity funds are only around 8%-9%, then switching to debt funds, can be beneficial.
If your financial goals change over time, then also you can rebalance your ULIP portfolio according to your updated financial goals. For instance, if you have been investing in the ULIP for wealth accumulation, then more equity in your ULIP can be justifiable, while if you are looking to earn a regular income from your ULIP portfolio, then more debt funds can be better for your ULIP portfolio.
ULIP rebalancing is quite easy as all the fund houses offer free switch options for rebalancing your ULIP portfolio. You can choose to switch between the equity and debt funds when the market changes or your risk appetite or financial goal changes.
Portfolio rebalancing is important from time to time, and when it is about ULIP, it is more crucial. Firstly, rebalancing your ULIP portfolio will help you fetch better returns, and then it will help minimize the risk involved in the investment portion of the ULIP. For instance, if you stay invested in equity funds during a highly volatile market, you can lose on your investments. Using a free switch, you can switch to debt funds for the short-term, and then when the market calms down and enter a bull run, you can again switch to equity funds for higher returns.
Conclusion
As portfolio rebalancing in a mutual fund is important, rebalancing your ULIP portfolio is crucial, too, for earning better returns and minimizing risks.
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