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Debt vs Equity ULIPS: Risk appetite matters

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Debt vs Equity ULIPS: Risk appetite matters
  • Stories
  • Debt vs Equity ULIPS: Risk appetite matters

Debt vs Equity ULIPS: Risk appetite matters

Debt vs Equity ULIPS: Risk appetite matters

Picture a lavish meal at a restaurant. There is an a la carte option which offers you the ability to pick and choose dishes as per your preferences, and there is a buffet where there is a set menu. Does a la carte sound more appealing? It often is, because it gives the ultimate power to you, the customer. The same goes for investment products too. Rather than a one-size-fits-all approach, it could be beneficial to look for products that offer multiple options. Unit-linked insurance plan (Ulip) is one such category.

With a unique blend of insurance and wealth creation, ULIPS provide risk cover against loss of life as well as opportunities for investment. However, there is a misconception that Ulip products only offer equity fund options. In reality, ULIPS provide the option to choose between equity, debt, and balanced funds. The returns are proportional to the debt and equity markets, depending on where your premiums are invested.

Equity ULIPS offer the potential for higher returns while debt ULIPS provide fixed income options. You could explore wealth creation through the insurance product options offered by Standard Chartered through their partners.

How do debt and equity ULIPS differ?

Debt ULIPS invest the premiums that you pay into bonds and treasury bills. These include long-term bonds, short-term bonds, commercial papers, and money market products. Both government bonds and corporate bonds are chosen as part of the investment strategy. This means that debt ULIPS could be less risky because fixed income products are not as volatile.

Equity ULIPS invest in listed shares of companies as well as sectoral indices that trade on the stock market. These ULIPS have a series of funds options, depending on the company size and market capitalization. However, volatility could be higher in equity ULIPS since these products invest in stocks.

There is a third category of ULIPS that have a dual flavour of equity and debt. Called balanced or hybrid ULIPS, these products invest in debt as well as equity.

How to choose the right option?

Your life goals could determine what Ulip is suitable for you. Here are two factors to consider:

  1. Risk-taking ability: Debt ULIPS generally offer lower volatility than equity ULIPS. However, equity ULIPS could offer higher returns. What to choose would depend on the level of risk you are willing to take. For instance, an investor in their 30s may have the room to take risks but someone close to retirement may have a lower risk appetite for equities.
  2. Fund requirement: Equity ULIPS could help generate higher wealth over a long duration. This means that it could be ideal for customers who want to accumulate a set amount of money for goals such as buying property, international vacations, or their child’s education. For investors who want fixed returns without major fluctuations, debt ULIPS could be an ideal choice.

Individuals who want a small share of equities in their investment portfolio could opt for hybrid funds that offer exposure to stock markets in addition to debt markets.

Having said that, each individuals’ fund requirements could be dynamic. Life stage changes such as marriage and child-birth could require higher funds. Standard Chartered’s wealth podcast could help you make an informed choice.

Is there an option to switch?

Absolutely. ULIPS offer the benefit of a fund switch. This means that you can switch between equity, debt, and hybrid options based on the prevalent market conditions. Typically, up to three fund switches could be offered for free every year. If you exceed that limit, there is a small fee imposed for switching. The charges vary from one life insurer to another.

You can either choose to manually switch funds or opt for auto switches. In the former option, you can switch funds based on how the market moves. For instance, if there is a rally in the equity markets it could be a good time to have a higher exposure to equity funds. In the auto-switch mode, the fund manager is responsible for making the switch decision.

Unlike mutual funds, there is no tax liability for fund switches within a Ulip. This means that you don’t need to pay taxes for switching between debt, equity, and hybrid. However, capital gains tax is applicable on maturity proceeds of ULIPS if the annual premium exceeds Rs 2.5 lakh. This came into effect from February 1, 2021.

Sometimes, Indian markets are impacted by global factors such as interest rate hikes and selloff in the equity markets globally. Standard Chartered’s market insights could be a tool to get a glimpse of such changes that impact your investments.

Ulip investments could provide triple benefits of insurance, investing, and tax exemption (Under Section 80C of I-T Act 1961). With an array of fund options, it could be a vital tool for wealth creation and fund accumulation for the future. Investments in multiple asset classes could help diversify your funds and minimise volatility.

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Disclaimer:

This article is for information and educational purposes only. It is meant only for use as a reference tool. It has not been prepared for any particular person or class of persons. The products and services mentioned here may not be suitable for everyone and should not be used as a basis for making investment decisions. This article does not constitute investment advice, nor is it an offer, solicitation, or invitation to transact in any investment or insurance product. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment. Prior to transacting, you should obtain independent financial advice. In the event that you choose not to seek independent professional advice, you should consider whether the product is suitable for you. You should refer to the relevant offering documents for detailed information.
Standard Chartered Bank is a distributor of mutual funds and referrer of other third-party investment products and does not provide any investment advisory services as defined under the SEBI (Investment Advisers) Regulations, 2013 or otherwise. Investments are subject to market risk. Read scheme-related documents carefully prior to investing. Past performance is not indicative of future returns.