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What are the different funds in a ULIP and why to switch between them?

Most Insurers offer a wide range of funds to suite’s one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles and thus, varied returns.

 

We have listed below some common types of funds that are available:

Sr. No General Description Nature of Investments Level of Risk
1. Equity Funds Invests in equity shares of the companies listed on the stock market. This may be further split into small-cap Equity, Mid-cap equity and Large-cap Equity High
2. Debt Funds/ Interest  Income Funds Invested in corporate bonds, government securities and other fixed income generating instruments Medium
3. Cash Funds/ Money Market Funds Invested in cash, fixed deposits or other money market instruments which are liquid. Low
4. Balanced Funds They are a combination of Equity and Debt i.e. a balance between Equity and debt. Medium to high

The funds of a ULIP are similar to the various fund classification of a mutual fund. It is due to the basic nature of both the investment products. However, it is not that easy to switch between mutual funds. Refer our Article on how to switch between mutual funds.

ULIPs are favorable due to the option to switch between different funds as per our needs and requirements.  The primary objective of switching funds is to leverage from the funds performing well. If your funds in your portfolio are not performing well then the peers, you may choose this option.

There is a basic cost involved in switching of funds which depends on the ULIP that you own. Some ULIPS, allow one transfer free and anything beyond that has a fixed cost. Refer our Article - Various Charges associated with a ULIP.

Also, many people make use of switching to meet their goals and make the most of the tax benefit. You may refer to our Article ----

To ensure that you make the most of this option, you must keep a track of the funds’ performance to make an informed decision.

  • Asset Allocation: You must switch to re-balance your portfolio, to maintain your asset allocation or to make the most of a sudden change in the market condition. This change in market condition may also require you to review your asset allocation. As discussed for this purpose switching is cheaper than selling and re-investing mutual funds.
  • Life stage Needs / goal-based approach: when a switch is required to achieve your goals set in mind, you must do the same using this option in ULIPS. For example, if you have invested for a 10-year long-term goal in an equity-based fund. Based on the rules of goal setting, from the 7th year, you should start switching your fund to a debt fund to not lose the gains made in an equity fund. Such a switch is cheaper and more convenient with a ULIP than with a Mutual Fund.

Since ULIPs are long-term market-linked plans, you should review and manage them appropriately to optimize your asset allocation, minimize the risk and maximize your returns. If you are not confident about managing it yourself, it does mean that you should lose the opportunity of growing your own wealth. You can always take advantage of the auto-manage options offered by the insurer or appoint a financial advisor who shall do the same for you.

To learn more - you can check our course - NM 102: Build a Safety Net. Use code SAVE20 for 20% off.

 

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    Equity / Insurance / Investments - 08/03/2018
    pexels-photo-241544

    Charges or cost of a ULIP

    ULIP is a combination of a life insurance product and an investment product, which provides risk cover for the policyholder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds. As a single integrated plan, the investment part and the protection part can be managed according to specific needs and choices.

    ULIP is catering to the insurance and the investment needs of a person and thus, is not a cheap product. There are various costs associated for both these facilities which make ULIP a comparatively expensive product in case of short-term investments.

    The list of charges that are levied in case of ULIP investments are as under:

    • Premium Allocation Charge

    Premium Allocation Charge is deducted as a fixed percentage from the premium paid in the initial years of the policy, it is charged at a higher rate. The charges include the initial and renewal expenses and intermediary commission expenses. It is a front load charge as it is deducted from your premium paid.

    • Mortality Charges

    This charge is to provide for the insurance coverage under the plan. Mortality charges depend on a number of factors like age, sum assured, etc and are deducted on a monthly basis. These are for the Insurance part of the product.

    • Fund Management Charge

    Fund Management Charge is charged by the company to manage various funds in the ULIP. It is levied for management of the funds and is deducted before arriving at the NAV. The maximum allowed is 1.35 percent per annum of the fund value and is charged daily. Generally, insurers levy the maximum allowed in equity funds, while the charge on non-equity funds is lower. These are for the Investment part of the product.

    • Partial Withdrawal Charge

    ULIPs have options for partial withdrawals of funds. Some plans offer unlimited withdrawals, but some restrict it to 2-4 withdrawals. These withdrawals can be for free up to a certain limit or can be charged based on your transactions.

    • Switching your funds

    Moving funds or investments between options is called switching. There are options to switch your funds for free up to a certain limit per year. Any further changes might incur a charge of INR. 100 -INR.250 per switch. This is to manage your investments.

    • Policy administration charge

    This charge is levied for the administration of the policy and it is deducted on a monthly basis by the cancellation of units from all funds chosen. This charge can be at a fixed rate or a percentage of your premium. These are for the insurance part of the ULIP.

    The only free benefit of the ULIP is the tax benefit that you get when you invest in ULIP under section 80C. However, for that, you must stay invested for a period of 5 years. If you withdraw any time before that, the amount withdrawn would be taxable.

    As an investor, it is very important that you know where your money is going. Many times you expect that after appointing an insurance agent for your investment needs all your investment worry is over, that may not be the case and the agent would continue selling you expensive investment products. You must learn and understand where your money should be invested to make the most of it. where you do not have the time to do so, appoint a financial advisor for yourself.

    To learn more - you can check our course - NM 102: Build a Safety Net. Use code SAVE20 for 20% off.

     

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      Insurance / Investments - 08/01/2018

      Step by Step Process for EPF withdrawal

      Broadly, withdrawal of EPF can be done either by:

      1. Submission of a physical application for withdrawal
      2. Submission of an online application

      1. Submission of a physical application

      For this, one can download the new composite claim (Aadhar)/ composite claim form (Non-Aadhar) from here :

      EPFO Portal

      The new composite claim form (Aadhar) can be filled and submitted to the respective jurisdictional EPFO office without the attestation of the employer whereas, the new composite claim form (Non-aadhaar) shall be filled and submitted with the attestation of the employer to the respective jurisdictional EPFO office. One may also note, that in case of partial withdrawal of EPF amount by an employee for various circumstances as discussed in the above table, very recently, the requirement to furnish various certificates has been done away with and the option of self-certification has been introduced for the EPF subscribers.

      2. Submission of an online application

      Interestingly, the EPFO has very recently come up with the online facility of withdrawal which has rendered the entire process easier and less time-consuming.

      Prerequisite: To apply for withdrawal of EPF online through EPF Portal, make sure that the following conditions are met:

      1. UAN (Universal Account Number) is activated and the mobile number used for activating the UAN is in working condition
      2. UAN is linked with your KYC i.e. Aadhaar, PAN and bank details along with the IFSC code.

      If the above conditions are met, then the requirement of an attestation of the previous employer to carry out the process of withdrawal can be done away with.

      Steps to apply for EPF withdrawal online:

      Step 1: Go to the UAN portal by clicking here  Step 2: Login with your UAN and password and enter the captcha.UAN Login

      Step 3: Then, click on the tab ‘Manage’ and select KYC to check whether your KYC details such as Aadhaar, PAN and bank details are correct and verified or not.PF KYC

      Step 4: After the KYC details are verified, go to the tab Online Services’ and select the option ‘Claim’ from the drop-down menu.PF Claim

       

      Step 5:  The ‘Claim’ screen will display the member details, KYC details, and other service details. Click on the tab ‘Proceed For Online Claim’ to submit your claim form. Step 6:  In the claim form, select the claim you require i.e full EPF Settlement, EPF Part withdrawal (loan/advance) or pension withdrawal, under the tab ‘I Want To Apply For’. If the member is not eligible for any of the services like PF withdrawal or pension withdrawal, due to the service criteria, then that option will not be shown in the drop-down menu.

      PF Withdrawal

      Investments / Salary / Tax - 07/28/2018
      12

      Types of Mutual Funds

      In the last few years, mutual fund companies were releasing various mutual fund scheme and there was a lot of confusion amongst retailers on the definition of the same and how are the classified. To avoid this, SEBI released a notification to classify mutual fund schemes into 5 broad categories:
      1. Equity Schemes
      2. Debt Schemes
      3. Hybrid Schemes
      4. Solution Oriented Schemes
      5. Other Schemes
      An understanding of the classifications of the various categories of schemes will help sort clear the confusion to a certain extent.
      All the listed Equity Stocks are divided into large cap, mid cap, and small cap equity stocks based on the ranking on the stock exchange as per their market capitalization. Accordingly, AMFI, in consultation with SEBI and Stock Exchanges, has prepared the list of stocks, based on the data provided by Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Metropolitan Stock Exchange of India (MSEI).
      • Large Cap Equity Stocks - 1st - the 100th company in terms of full market capitalization.
      • Mid Cap Equity Stocks are - 101st - the 250th company in terms of full market capitalization.
      • Small Cap Equity Stocks are - 251st company onwards in terms of full market capitalization

      EQUITY MUTUAL FUNDS

      Any fund which invests not less than 65% of its corpus in equities is known as an equity fund. 
      1. Multi-Cap Funds: An Open-ended equity scheme which invests a minimum of 65% of its total assets in equity related instruments. These funds invest across large-cap, small-cap and mid-cap stocks.  
      2. Large Cap Funds: An open-ended equity scheme which invests a minimum of 80% of its total assets in large-cap equity stocks.
      3. Large & Mid Cap Funds: An open-ended equity scheme which invests in both large-cap and mid-cap stocks with a minimum of 35 % of its total assets in large-cap equity stocks and a minimum of 35% of. its total assets in mid-cap stocks.
      4. Mid Cap Funds - An Open-ended equity scheme which invests a minimum of 65% of its total assets in mid-cap equity stocks.
      5. Small Cap Funds - An Open-ended equity scheme which invests a minimum of 65% of its total assets in small-cap equity stocks. 
      6. Dividend Yield Funds - An open-ended scheme which predominately invests in dividend yielding stocks and has a minimum of 65% of its total assets invested in Equity.
      7. Value Funds - An open-ended scheme following a value investment strategy and invests a minimum of 65% in equity and equity related instruments.
      8. Contra Funds - An open-ended scheme should follow a contrarian investment strategy with a minimum of 65% in equity and equity related instruments.
      9. Focussed Fund - An open-ended scheme focussed on the number of stocks (maximum 30) and has a minimum investment of 65% of its total assets in Equity and equity related instruments.
      10. Thematic Funds: These funds are also known as Sectoral Funds. An open-ended scheme which invests a minimum of 80% of its assets in equity stocks of a particular sector/theme. Such funds can be focused on Infrastructure, Power, Banking sector, Pharma companies, only Public Sector Undertakings(PSUs), etc. 
      11. ELSS - Equity linked savings scheme - An open-ended scheme with a statutory lock-in of 3 years for the purpose of tax deduction. It has a minimum investment in equity and equity related instruments of a minimum of 80%.

      DEBT FUNDS

      Debt Funds are funds that invest in debt securities like debentures, commercial paper(CP), certificate of deposit(CD), government securities, etc.
      1. Overnight Funds - Investment in overnight securities having a maturity of 1 day.
      2. Liquid Funds - Investment in debt and money market securities with a maturity of up to 91 days only.
      3. Ultrashort Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months - 6 months.
      4. Low Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months- 12 months.
      5. Money Market Funds -Investment in Money Market instruments having maturity up to 1 year
      6.  Short Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years
      7. Medium Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years
      8. Medium to Long-Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years
      9. Long Duration Funds - Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years
      10. Dynamic bond - An open-ended dynamic debt scheme investing across the duration
      11. Corporate bond Funds - An open-ended debt scheme  with a minimum investment of 80% in the highest rated corporate bonds
      12. Credit Risk Funds - An open-ended debt scheme with a minimum investment of 65% in the highest rated corporate bonds.
      13. Banking and PSU Fund - An open-ended debt scheme with a minimum investment of 80% of total assets in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions
      14. Gilt Fund - An open-ended debt scheme with a minimum investment of 80% of its total assets in government securities across the maturity
      15. Gild Fund with a 10-year constant period - An open-ended debt scheme with a minimum investment of 80% of its total assets in government securities having a constant maturity of 10 years
      16. Floater Fund - An open-ended debt scheme with a minimum investment of 65% of its total assets in floating rate instruments.

      HYBRID FUNDS

      Hybrid funds are funds that invest in a mix of debt and equity based on their investment mandate.

      1. Conservative Hybrid Funds - An open-ended scheme investing 10%-25% of its total assets in Equity and 75% -90% in debt instruments.
      2. Balanced Hybrid Funds - An open-ended balanced scheme investing up to 40%-60% of its total assets in both debt and equity. No arbitrage is permitted in this scheme.
      3. Aggressive Hybrid Funds - An open-ended hybrid scheme investing 65%-80% of total assets in Equity and Equity related instruments and 20%-35% in debt and debt related instruments.
      4. Dynamic Asset allocation or balanced advantage - Investment in equity/debt that is managed dynamically.  (0% to 100% in equity & equity related instruments; and 0% to 100% in Debt instruments)
      5. Multi-Asset Allocation - An open-ended scheme which invests in at least three asset classes with a minimum of 10% in each of the three asset classes.
      6. Arbitrage Funds - An open-ended Scheme following arbitrage strategy. Minimum investment in equity and equity related instruments of 65 of total assets.
      7. Equity Savings - An open-ended scheme investing in equity, arbitrage and debt with a minimum investment of 65% of its total assets in equity or equity-related instruments and a minimum of 10% in debt instruments.

      SOLUTION ORIENTED FUNDS

      1. Retirement Fund - An open-ended retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier)
      2. Children's Fund - An open-ended fund for investment for children having a lock-in for at least 5 years or till the child attains the age of majority (whichever is earlier)
      3. Index Funds/ETFs -An index fund is a mutual fund or exchange-traded fund(ETF) that aims to replicate the returns of a specific index. The fund manager does not have a major role as he has to only replicate the composition of the index.
      4. FOFs (Overseas Funds) - An open-ended fund of fund scheme investing 95% of its total assets in the underlying funds.
      Investments / Mutual Funds - 04/12/2018
      SIP

      Why a Systematic Investment Plan(SIP)?

      SIPs have become the most favoured route of investments for not only the investors but also Financial Advisors in India. That is not surprising since they come with considerable benefits.

      Become a Disciplined Investor

      A SIP helps you discipline yourself. You can commit a fixed amount each month to investments, and the amount gets invested at the predetermined date. This ensures that money does not lie in your savings account @ a meagre 3.5% and there is no temptation to spend that amount as it is not there to spend.

      Rupee Cost Averaging

      Enormous sums of money have been lost by investors in a bid to time the market. But no one has been able to do it consistently. When experts have failed, what about a rookie investor. It is useless, even attempting to time the increasingly volatile markets. SIPs ensure that a fixed amount is invested irrespective of the ups and downs in the market and hence the cost of acquisition of investments is averaged out.

      The timeless principle is "Buy Low Sell High". However, investors tend to sell out when there is a fall in the markets due to panic. A rising market tempts them to enter the markets at high levels. SIPs help to overcome this problem. 

      Achieve your Financial Goals

      Your future financial goals like buying a car, buying a house, child's education can be converted into the required monthly SIPs. For example, if you need INR 6 lakhs after 4 years to purchase a car. Assuming that your investments earn 15% per annum, you will need to save INR 9,198 per month to achieve a corpus of INR 6 lakhs. By converting your goals into monthly investments, you can view the achievability of your goals clearly and this also motivates you to stay on track with your investments.

      Compounding Benefits

      The biggest advantage of regular long term investments, Compounding Benefit. The investments made continue to grow year on year and the invested profits participate in growth in future years.

      Effortless Investments

      Once initiated an SIP can go on for as long as you want it to run with no further intervention required from your side. With a simple instruction, the SIP can be stopped at anytime.

      Investments / Mutual Funds - 01/02/2018

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