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The Right Balance

Chandralekha Mukerji   Delhi     Print Edition: December 2011

With interest rates expected to fall, long-term debt funds have started buying debt papers with long tenures to gain from high yields. So, is it time to change your unit-linked insurance plan (Ulip) portfolio and use the free-switch option available with the plan to increase exposure to debt?

Moving to debt will mean forsaking equity. Therefore, it is important to calculate the implications of getting out of the equity market at this point. "The market situation when you got in is important. First, calculate the returns you have earned so far from the equity portfolio. If the profit is 9-10 per cent, it makes sense to shift to debt for the short term by using the free-switch option. Once the equity market gains momentum, you can go back to it to maximise returns," says Satkam Divya, business head, Rupeetalk.com.

"In case you have still not gained from the equity portfolio, it is better to stay put for some more time till you get your targeted gains," he says.

Another view is that the equity markets have already corrected sharply this year and are attractively priced. Thus, moving to debt at this point may not be that profitable. "From the current stand point, we believe investors can generate attractive returns on equity funds in the long run," says Rituraj Bhattacharjee, head, market management, Bajaj Allianz Life Insurance.

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Since Ulips perform best in the long term, quick changes only because the markets are volatile will not be profitable over a period and therefore should be avoided. One must approach asset allocation between equity and debt based on one's risk-taking ability and the need for funds and not get swayed too much by market conditions.

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The Right Mix
Ulips offer huge flexibility. But just because the insurer allows you 20 free switches a year doesn't mean you should use all of them. "The customer has the flexibility to book profit or switch from equity to bond or money market instruments and vice versa without any change in the product. It is convenient and there are no tax liabilities, unlike in mutual funds. However, our experience shows that investors use this facility sparingly," says Abhijit Gulanikar, chief officer, investments, SBI Life Insurance.


"Switching in Ulips is convenient and there are no tax liabilities. Yet, our experience shows that investors use this facility sparingly."
Abhijit Gulanikar
Chief Officer, Investments, SBI Life Insurance


You should change the asset allocation according to your changing risk profile and expectation of capital market movement.

"Depending on the policyholder's perception of the market and his risk appetite, he could choose to tweak his portfolio with every 10-15 per cent change in the benchmark. A mix of disciplined asset allocation and debt switching can yield good results for a proactive policyholder," says Gaurav Jain, product manager, Fullerton Securities.

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Here are some points you must consider before requesting your insurance company to make changes in your Ulip portfolio.

Risk appetite
Risk-taking capacity varies from person to person and should decide the equity-debt mix. The risk appetite depends on your age or the stage of life you are in, asset ownership, financial standing and investment experience.

"When you are young, you can take more risk since you have few dependents and a long earning life ahead. Therefore, exposure to equities can be high. Similarly, if you have a lot of assets and few liabilities, that is, a high net worth, you can afford more risk as assets can work as a cushion from short-term losses due to fluctuations in the market," says Bhattacharjee.

Financial Goals
If you have invested in a Ulip for a particular aim such as your child's future, building a retirement corpus, buying a property, etc, the equity-debt mix has to be in accordance with the goal. For instance, if you set out to create a fund to act as a regular source of income after retirement and the maturity date is close, it will be wise to start shifting money to conservative assets.

The investment horizon of your financial goals is also a deciding factor for asset allocation. This makes sure you achieve both short-term and long-term financial goals.

If your goal is far away, you can keep the portfolio equity-heavy so that it fetches you higher returns as risks related to equity, such as volatility, are evened out over the long term.


"Change in Ulip portfolio in initial years might not affect the cover but move towards debt near maturity years to avoid any downside surprises."
Gaurav Jain
Product Manager, Fullerton Securities


However, if you need the money in the near future, you should park a sizeable part of your capital in safe debt. If you plan to make partial withdrawals in the middle of the Ulip term, make sure you rebalance the portfolio.

"When the time for mid-term withdrawal is near, it makes sense to transfer the profit to protect the returns you have made. Once the money has been withdrawn, you can make future investments in riskier and high return-oriented funds, given that you will have a long time before your policy matures or you make another withdrawal," says Divya.

Market conditions
Take note of market conditions and track the net asset values of your funds regularly. "When there are signs of a downturn in the equity market, but you feel it still has not hit the bottom, shift from equity to debt. Since equity returns and debt yield move in cycles and in opposite directions, once shares start moving down, bond yields and interest rates are bound to move north and vice versa," explains Divya.

Other investments
With so many financial products in the market, in all possibility, Ulips are not your only investment. Therefore, just focusing on the Ulip asset mix will not be correct. Let's assume that apart from Ulips you have some money in your PPF account.

"Your PPF investment will give you low but guaranteed returns. So, there is no point in going for debt-oriented Ulips. It makes more sense to opt for equities to maximise the overall returns," says Divya. Financial planners say you must take into account all your holdings and look at them as one big kitty and then decide the asset allocation in the Ulip portfolio so that it jells with the overall financial plan.

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While asset allocation is a critical decision, whether for the Ulip portfolio or overall financial planning, there is no standard solution. Every investor has his unique requirements and the equity-debt mix should be based on that. Remember that it's a continuous process which requires re-evaluation and adjustment from time to time.

Does Switching Affect the Cover?
Ulips are a combination of investment and insurance. So, does making changes in the investment part affect your insurance coverage? The answer will depend on the type of product you have bought. Some Ulips offer the sum assured or the fund value, whichever is higher, as death benefit, while others keep investment and insurance portfolios separate.

Hence, in the first type, mortality charges are calculated as the difference between the sum assured and the fund value, whereas in the second type, the mortality charge is on the entire sum assured for the term of the policy.

If you have bought the first type, you better be cautious while fiddling with the fund mix as the insurance amount available will vary with the investment value. There is always a guarantee that you will get the sum assured. However, if you are prudent in handling the investments and your fund manages to earn good returns, there is a possibility of getting more.

"Change in investment portfolio in initial years of investment might not affect the insurance cover but it is advised to change your asset allocation towards debt when the policy is near maturity years to avoid any downside surprises," says Jain.

In the latter, the insurance cover is decided at the time of purchase of the policy on basis of income, age, number of dependents, etc. Therefore, any change in the portfolio mix will not impact the insurance coverage.

However, if you decide to pay a top-up premium on your Ulip, your sum assured will increase along with the investment amount.


On Auto-Pilot

Rebalancing Ulip portfolio
There are two types of switching in most Ulips. One is where investors switch funds themselves, called the 'manual' mode, and the other is where your money is moved automatically by the fund manager, who switches between equity and debt according to his reading of the market.

For instance, if it is believed at any particular time that the equity markets have peaked and a fall may happen in the immediate future, the fund manager will shift to debt to protect investors from any potential downside from equity and vice versa.

Another aspect is age. In this the investment is gradually shifted from equity to debt keeping in mind the investor's age and the outstanding term of the policy.



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