How to Invest in ULIP: A Complete Guide

A ULIP invests your premium in market-based funds of your choice, providing you with an opportunity to enjoy the long-term market performance. Now, if you assess the ULIP returns in the last 5 years, you will notice short-term fluctuations.

However, a 20-year horizon allows compounding to work more effectively. The more the gains are reinvested, the greater the likelihood of your investment growing, compared with holding the policy for 5 or 10 years.

A ULIP is a combination of insurance and investment that provides you with a life cover as you develop your financial portfolio. This insurance guarantees that your family has a financial buffer to fall back on in case of an unexpected occurrence. It offers a kind of security that is more than just saving or investing.

The flexibility to switch between equity, debt, or balanced funds within the 20-year period is among the major strengths of ULIPs. Most plans allow several switches, enabling you to adapt your investment strategy to market movements or changing financial goals.

After the 5-year lock-in period is completed, ULIPs usually allow partial withdrawals. It helps you manage emergencies or specific milestones while keeping your long-term investment strategy intact.

By placing your money in market-linked funds, a ULIP helps your savings grow over time. This feature makes it one of the most effective investment plans for long-term goals. Staying invested for a full 20-year term allows your contributions to benefit from sustained market growth and compounding.

Premiums paid towards a ULIP can be claimed under Section 80C of the Income Tax Act (applicable only under the old tax regime). Subject to conditions, the maturity proceeds may also be exempt under Section 10(10D). These tax benefits improve the overall value of staying invested for the entire 20-year duration.

This is the easiest way to determine how much your investment has grown. You only need the current NAV and the NAV at the time of purchase. To work out the absolute return:

● Subtract the current NAV from the original NAV

● Divide this difference by the initial NAV

● Multiply the final result by 100 to convert it into a percentage

Formula:

[(Current NAV-Initial NAV)/Initial NAV] × 100

This method allows you to analyze the ULIP annual return throughout the policy duration. To calculate it:

● Add 1 to the absolute return

● Raise this figure to the power of 365 divided by the number of days the policy has been held

● Subtract 1 to arrive at the annualised rate

Formula:

[(1 + Absolute Rate of Return) ^ (365/number of days)] –1

CAGR reflects the average yearly growth of your investment without accounting for market fluctuations during the period. It shows how much your NAV would need to increase each year to reach the final value.

Formula:

{[(ending value of NAV/beginning value of NAV)^(12/number of months)] – 1 per lakh invested}*100

The outcome of a ULIP depends on the market conditions. Since returns depend on the underlying funds, strong market conditions can support higher growth, while downturns may reduce gains. Examining the historical track record of the funds and monitoring the market conditions can provide insight into the probable outcomes.

The fund manager's skills are the main determinants of ULIP performance. Experienced managers make informed investment decisions that can lead to higher returns. Before choosing a ULIP, it is worth considering the experience and investment style of the manager.

The amount of the premium charged determines the value of the ULIP in the end. The premiums will help to accumulate more wealth, yet the sum must be reasonable and in line with long-term goals. One should also know the impact of the premium allocation charges on the effective invested amount.

All sorts of charges, like mortality charges, fund management charges, and fund allocation charges, can diminish returns over time. Keeping an eye on these charges can make it easier to explore ULIP plans that provide stronger overall value.

Economic dynamics like inflation, interest rates, and overall economic well-being are some of the factors that influence fund performance. It is possible to consider the broader economic context and set realistic expectations. Risk management may also be achieved through diversification of the investments in the ULIP.

The balance between equity, debt, and hybrid funds determines the risk–return profile of the ULIP. A well-diversified mix supports stability while offering scope for growth. Asset choices should match the policyholder’s goals and appetite for risk.