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The markets are extremely volatile and if you have invested a sizeable amount in unit-linked insurance plans (ULIPs) particularly the equity option, you must be a nervous person now. Now you're perhaps mulling over how to preserve accumulated capital before the markets slip some more.
How about exercising your fund switch option and transferring your money to a less-risky option such as debt? But is this the right time to switch or should you hold on for some more time?
Insurance is need-based
Chief financial officer, SBI Life Insurance, N Subrahmaniam, explains, "As a policyholder of Ulips, you should not look at market timing. Ulips cannot be compared with mutual funds. Your emphasis should be on long-term investments. But then if you would still like to make good of the present Bull Run and are market savvy, you could go in for a part transfer of your Ulips from equity to cash option. Debt is not a good option now."
An important factor you need to bear in mind with Ulips is that, these are a combination of insurance and investment. A word of caution here -- since it is your protection cover that you would be tampering with, your decision to switch needs to be well thought out before you exercise it.
Chief investment officer, ICICI Prudential Life Insurance, Puneet Nanda, opines, "You should consider what your financial needs and goals are and what asset allocation will help you to achieve this. Once this is done, you could adhere to a specific allocation for your portfolio and not falter from it, despite temptations from the market. For instance, if you have decided to have a 60:40 equity-debt ratio and the markets move, see to it that you still have the 70:30. In such situations, it is advisable to move some funds so as to retain the same ratio. Which means, if you are already invested in equities, may be you could switch to debt, provided it actually falls within your asset allocation."
Certified financial planner, Jayant Pai, too is not in favour of switching Ulip funds. He asks, "Why did you buy Ulips in the first place, if you wanted to keep switching. Ulips are a long-term investment product and the market returns are the icing on the cake. But then if you still want to cash in on the boom, this is a good time to switch. Switch only 60-65%, not the entire fund, to debt. Maybe you could instruct your insurance company to switch your equity component to the balance fund directly. This is because the balance fund is usually 55% equity with debt constituting the rest."
Do you want to be cautious?
Chief financial officer, Kotak Old Mutual Life Insurance, Gangadharan Murli, says, "If you are market savvy and want to book some profits right away, switch one-third of your funds in equity now to debt. May be, after a brief period, you could try switching again. But do not switch all your funds to debt at one go."
This shift of funds, when the market is at its peak would help you preserve it in a less risky option such as debt. Most insurance companies offer three fund options to choose from -- equity, debt and balanced, with two or three free switches in a year. And perhaps this is the opportune time for those who are inclined to book profits.
Financial experts say that the industry has matured to a great extent. Bhalla, adds, "If you really have a good knowledge of interest rate fluctuations, only then go in for a debt fund. Right now the interest rates are fluctuating all over the world and all that has a bearing on the debt market here. If you are a passive investor and want to play safe, simply shift to a cash fund and stay invested. On the contrary, if you are in balanced funds, you are really safe don't shift out of it."
Certified financial planner Atul Parekh agrees, "It's difficult to time the market, so remain in equity. In debt you'll hardly get 5-6% annually. Ulip is a long-term product. But the downside is that, the market could get choppy anytime and go down maybe 200 points. But again, the second quarter results of companies are good and the economy is also buoyant, so one can safely assume that the future outlook is optimistic."
Now after making all these nifty moves, is tax bothering you? Be assured -- switching Ulips funds does not attract any kind of tax.
For more on mutual fund investments, log on to www.moneycontrol.com.