On the flip side, ULIPS do not guarantee any returns. It is left to the policyholder to make the investment choice from the available fund options thereby transferring investment risks to the policyholder. In fact, a common disclaimer viz-Market risks in the policy is to be borne by the policyholder-makes investors risk wary. Thus choosing the fund most suitable to the investor's risk-appetite holds the key to desired returns. ULIPs generally offer a choice of 4 funds namely-
EQUITY FUND- also called Growth Funds where the majority of the portfolio consists of investments in shares/stocks traded in Stock Market.
DEBT FUND- Also called Bond Funds where the investments are primarily in government debt and Govt. guaranteed securities like gilts or corporate bonds.
MONEY MARKET FUND- also called Cash Funds or Liquid Funds where investments are largely in short-term Money Market instruments like Treasury Bills, Commercial Paper etc.
BALANCED FUND- this fund offers a mix of Equity and Debt Fund.
The choice of funds determines the attitude of individual investors towards wealth management. As for instance, say Mr. Verma invests regularly in the Share market and prioritizes wealth augmentation. His preferred choice would be Equity Fund where returns are erratic but good. Contrarily, Mr. Sharma is risk-averse and wants a slow but steady growth. For him, debt fund or Liquid fund would be ideal because of its low-risk portfolio.
In Debt fund, the portfolio consists of Govt. or Govt. guaranteed securities. The risk is extremely low due to the fact that Govt. securities or corporate bonds are always issued as fixed-income bearing instruments. As such, the uncertainty of return is minimized to an almost negligible amount. The fixed income bonds generally generate a fixed interest in the range of 8-12%. As such, the return on these funds range in the spectrum of 6-12%. Similarly, Liquid Funds invest in Money Market instruments like short-term Treasury Bills, Commercial Paper etc where again the risk associated is negligible.
The NAV performance of Debt and Liquid funds show us the returns generated by few companies in the last 2 years.
1. AVIVA LIFE INSURANCE CO. LTD.
NAV as on 1st April 2010- 13.30
NAV as on 31st March 2011-14.08
NAV as on 1st April 2011- 14.08
NAV as on 31st March 2012- 15.29
2. AEGON RELIGARE LIFE INSURANCE
NAV as on 1st April 2010-12.77
NAV as on 31st March 2011-13.58
NAV as on 1st April 2011- 13.59
NAV as on 31st March 2012- 15.01
3. BAJA ALLIANZ LIFE INSURANCE
NAV as on 1st April 2010- 13.91
NAV as on 31st March 2011- 14.58
NAV as on 1st April 2011- 14.61
NAV as on 31st March 2012-15.51
1. HDFC LIFE INSURANCE
NAV as on 1st April 2010- 12.07
NAV as on 31st Mrach 2011- 12.82
NAV as on 1st April 2011- 12.84
NAV as on 31st March 2012- 13.92
2. INDIA FIRST LIFE INSURANCE
NAV as on 1st April 2010- 10.08
NAV as on 31st Mrach 2011- 10.57
NAV as on 1st April 2011- 10.58
NAV as on 31st March 2012- 11.37
3. BAJAJ ALLIANZ LIFE INSURANCE
NAV as on 1st April 2010- 13.81
NAV as on 31st Mrach 2011- 14.75
NAV as on 1st April 2011- 14.77
NAV as on 31st March 2012- 16.04
From the details above it is clear that though returns are conservatively low, the inherent risk is minimal. Hence, Debt and/or Liquid Funds are perfect solutions for the dilemma of those investors who shy away from the risks presented by Capital markets as they enable reasonable returns while eliminating investment risks considerably.
Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
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