ULIPs are smart investments for the future

One of the best investment options currently is the ULIP. We examine how it works and what makes it such a great choice.

An investor looks to create wealth by making investments. However, the chosen investment instrument must be the right one: there are several types of investments to choose from, but which of them is the best investment option in India?

While every investment instrument has its merits and demerits, there are some that provide high returns at low to moderate risk to the investor. Many investors are averse to playing very high stakes on the stock market to get gains. In this context, it is pertinent to note a very good investment known as the Unit Linked Insurance Plan (ULIP), one of the best investment plans offering a mix of insurance as well as income for the future.

What is a ULIP?

As mentioned earlier, a ULIP offers the dual benefit of insurance for you and your loved ones with investment and returns thrown in. It is essentially an insurance policy that the holder pays premiums for. However, unlike other insurance policies, the premiums in a ULIP are divested in two parts.

One part goes towards paying the premium for the insurance, while the other is invested in good quality, high performing equity shares. Normally, a fund manager handles this particular aspect of investment by keeping close tabs on market trends. The fund manager manages the entire equity portfolio while taking a yearly fee for doing so, apart from a commission from income. No investments are made without informing the investor and taking approval.

Once the investment is made, the insurance company allots specific ‘units’ of shares to the policy holder. This allotment is subject to how much money is invested in the equity shares. The fund manager examines the unit value closely. The unit value changes as per changes in market trends, and the potential for income stems from these changes. An experienced fund manager will keep tabs on earnings basis the market values per business day.

There is a lock-in period of three years for the ULIP. However, the investor has the freedom to assess the shares invested in and also choose to change the chosen securities in favour of better ones. This is important, because the investor has full control over how much he can earn from the securities in his portfolio. Besides, the ULIP investment is a long term one, thus giving investors the chance to study the folio performance and make corrections when needed.

The maturity of the ULIP provides a large corpus of money that can be used for a variety of personal or professional needs. Some investors choose to re-invest a portion of the money earned in other investment options in India.

Additionally, the sum assured under ULIPs is tax deductible under Sec 80C of the Income Tax Act, 1961.