India has a diverse population, including millennials, young individuals, and those nearing retirement. Each of these groups is unique in many ways, such as income, financial profile, future plans, and more. A crucial aspect that differentiates them is the risk profile, i.e., the degree of risk they can take while investing money in a suitable instrument.
You might have heard millennials are less risk-averse than the generations behind. They are also more interested in following a financial plan and insuring their life from the very start of their careers. When it is about getting the benefits of both life insurance and good returns, ULIP comes into the picture. It is a unique type of life insurance policy that caters to both the aspect of life cover and investment.
ULIPs are a suitable option for people of all ages. Still, it is important that you assess your risk profile before you invest in them. Wondering why you should do that? Read more about the reasons below:
1. To Select the Most Suitable ULIP
Different ULIP plans are based on different underlying funds, each of which invests a certain portion of the premium in equities. This can range from 0% to 100%, depending on the plan you choose to invest in.
Knowing your risk tolerance capability helps in selecting a plan that matches your profile. This way, you can be realistic about the benefits you can expect from the plan, be it life cover, good returns, and guaranteed bonus, if any.If you are not interested in taking risks, you would resort to a ULIP that invests a lower proportion of the premiums in equity funds.
On the other hand, not knowing about your risk appetite may make you select a ULIP that does not suit your needs. It would be better if you research about ULIP full form, how it works, and several aspects before investing in it.
2. To Switch Between Funds
By investing in a ULIP, you get the opportunity to invest in equity and debt funds, each of which has its specific risk-to-return factor. You can also switch between these funds, i.e., move a part or whole of the invested amount from one fund to the other within the same plan. This fund switching feature gives you the freedom to capitalize on the returns as per market conditions.
Your risk appetite can also be defined as the extent to which you can handle market-related risks. Knowing about it will help you make fund switches appropriately. For example, if you do not want to take high risks, you can choose to invest more in debt funds under the best ULIP plans in India.
3. To Achieve Your Financial Goals
For many people, having a long list of goals in life feels scary. With a limited income source and several responsibilities, it becomes difficult to continue working to achieve such financial goals. Being aware of your risk-taking capability while investing in ULIP helps align your portfolio to your goals.
If you are in your 30s and want to invest money to achieve retirement goals, you can take higher risks with your investments at this age and invest more in equity funds through a ULIP. Once you reach near your retirement age, you can switch to other funds to lower the risk.
4. To Get the Benefit of Partial Withdrawals
At any time, the need for money can arise in our lives. When you invest money in a ULIP plan, you will want to know if this financial instrument offers liquidity to meet financial emergencies. This is how you will get to assess your risk appetite for such investments.
ULIP offers a partial withdrawal facility but after the completion of a lock-in period of five years. Some of the best ULIP plans in India allow unlimited withdrawals, while others have restrictions for up to three or four withdrawals only. You may also be charged as per your transactions.
When you have a clear idea of the risk-factor, you can plan the investments accordingly, keeping in mind the scope of liquidity for possible emergencies.
How Should You Buy and Manage a ULIP?
Given the current pandemic times in which the utility of Internet in our lives has risen manifold, it would be best if you plan investing in a ULIP online. Comparing different ULIP plans online is easier, which helps in making an informed investment decision. Once bought, you can also track market movements and switch funds online using the provisions made available by the chosen insurer.
Any investment decision in life requires a considerable understanding of the related risks and returns. Before you invest in any ULIP, assessing your risk appetite is advantageous in many ways.