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ULIPs in a Rising Market: Should You Switch or Stay Invested?

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ULIPs in a Rising Market: Should You Switch or Stay Invested?
October 25, 2024

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ULIPs in a Rising Market: Should You Switch or Stay Invested?

With both interest rates and the stock market on a high, investors face a crucial question: should they switch their ULIP funds or stay invested? It is a decision that can significantly impact returns, but it is not always clear which path is best. Let us break down the key factors to help you decide whether to switch funds within your ULIP or stay the course. 

Understanding ULIPs

ULIPs, or Unit Linked Insurance Plans, offer a good combination of life insurance coverage and investment opportunities. When you invest in a ULIP, a portion of your premium goes toward life insurance, while the rest is invested in funds that hold assets such as equities, bonds, or a mix of both, depending on your preferences. This flexibility allows investors to customise their ULIP investments to fit their risk tolerance, whether they prefer a conservative, aggressive, or blended approach.

Another key feature of ULIPs is their long-term nature. Unlike short-term investment options, ULIPs with a minimum 5-year lock-in are designed to deliver returns over a longer period. This makes them particularly attractive for goals such as retirement or children's education.

Rising Interest Rates and Markets

With interest rates rising, many investors wonder how this will impact their ULIPs. Higher interest rates can affect the insurance component of a ULIP, as the cost of coverage might rise slightly. On the other hand, rising interest rates can present challenges to fixed-income funds, which may deliver lower returns when interest rates are high.

At the same time, the Indian stock market has been experiencing growth, making equity-based ULIP funds appealing. Rising markets can boost the returns of equity-heavy ULIPs, giving investors the opportunity to benefit from strong market performance. For instance, data shows top-performing ULIP funds have generated* 30-35% CAGR over 5-year period. Experts predict that India’s economic growth, and intent to become a developed nation by 2047, will continue to support this upward market trend.

Having said all this, market fluctuations remain a reality. The Nifty 50 has had 19 market drops of at least 10% in the past 16 years. These drops, on average, were about 14%. Over the last 25 years, there have been 8 market crashes of 20% or more, roughly one every 3 years#.

Switching vs. Staying Invested

When faced with rising interest rates and market growth, some investors may consider switching to different ULIP funds. 

Switching to a higher-performing fund, especially one that is more equity-focussed, could potentially enhance returns in a rising market. Diversifying across different asset classes can also help manage risk.

However, switching funds comes with potential downsides too. Transaction fees or switching charges can reduce the overall benefits, and timing the market is tricky. Moving funds when the market is peaking can lead to missing out on long-term gains.

On the other hand, staying invested in your current ULIP fund offers the advantage of stability. If your current fund has performed well over time, there is little need to switch. The consistency of staying invested through market ups and downs can help you benefit from long-term growth.

Key Things To Consider

When deciding whether to switch or stay invested in your ULIP, several factors come into play.

Investment Objectives: Consider your financial goals. Are you looking for long-term growth, or do you need immediate gains? ULIPs are typically geared towards long-term objectives like retirement, so switching might not be necessary if you are in for the long haul.

Risk Tolerance: Your comfort level with market volatility should guide your decision. If you are risk-averse, staying in a balanced fund may be the best approach. Switching to a more aggressive fund could pay off if you are comfortable with more risk.  

Fund Performance: Review how your current ULIP fund has performed compared to other funds available within your policy. If it is underperforming, switching may be worth considering. Staying invested could be the smarter option if it meets your expectations.

Market Outlook: Take the broader economic trends into account. While rising markets are encouraging, it is important to stay realistic. If you believe the current market rally will continue, switching to an equity-heavy fund might make sense. However, if you expect volatility, a conservative fund could provide more stability.

Impact of Different Fund Types

The choice between switching or staying invested in your ULIP can also be influenced by the specific type of fund you are currently invested in. Here's a breakdown.

  • Equity Funds: If you are invested in equity funds, which are generally more volatile but offer higher potential returns, the decision to switch or stay invested might depend on your risk tolerance and market outlook. If you believe the market will continue to rise, staying invested in equity funds could be a good option. However, if you are concerned about market volatility, switching to a more balanced fund might be prudent.

  • Debt Funds: Debt funds are generally considered less risky than equity funds, but they may offer lower returns. If you are invested in debt funds and the interest rate environment is favourable, staying invested could be a good strategy. However, if interest rates are expected to rise, switching to a more equity-oriented fund might provide better returns.

  • Balanced Funds: Balanced funds invest in a mix of equity and debt securities, offering a balance of risk and return. If you are currently invested in a balanced fund and are satisfied with its performance, staying invested might be a reasonable choice. However, if you want to increase your exposure to either equity or debt, switching to a fund with a different allocation might be beneficial.

What Should You Do?

Whether to switch or stay invested in your ULIP depends on several factors, including your personal financial goals, risk tolerance, and the performance of your current fund. While switching funds may provide a short-term boost in returns, it is not always necessary, especially if you are committed to long-term growth. 

Timing the market is notoriously difficult and often leads to suboptimal returns. By trying to sell assets at market peaks and buy back in at market troughs, investors risk missing out on significant gains. Instead, focusing on long-term investment strategies and staying invested through market ups and downs is key to achieving robust wealth creation. 

For example, if an investor aims to grow an initial investment of ₹10 lakh to ₹100 lakh in 15 years, worrying about booking profits at every ₹10 lakh milestone can be counterproductive. The key is to remain patient and disciplined, allowing the power of compounding to work over time.

Sources

*https://www.morningstar.in/insurance/ECInsuranceScreener.aspx?tabs=ltperf5Yr 

#https://www.etmoney.com/learn/stocks/how-to-make-the-most-of-stock-market-correction

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ARN: ED/10/24/16706

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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