When it comes to market-linked financial instruments, you are bound to hear about ULIPs. Many investors and first-time buyers are now considering ULIP to be a lucrative investment opportunity due to its features. However, before you jump at the chance, it is crucial to know the risks involved and evaluate them especially for risky asset classes like equity. So, is it possible to assess the ULIP equity fund risk to help pick the right one? Let’s understand what you should consider while opting for the ULIP equity fund option.
What Are the ULIP Fund Options Available?
When you purchase a ULIP policy, you get a choice to pick from four types of ULIP funds varying in risk exposure. These include the equity fund option, which comes with the highest risk, debt fund with moderate risk and cash funds with low risk. Based on your risk appetite, you can pick any one of the fund options to earn returns from your ULIP investment. Selecting a suitable fund type depends on aspects such as your age, life goals, risk appetite, income, budget, etc. Even if you were to pick a fund type that stops meeting your investment needs in the future, you can choose to switch funds. This is a feature available under Unit-Linked Insurance Plans.
What Should You Consider While Investing in ULIPs?
As you have the opportunity to invest in the equity market, you must first assess the risks and benefits of choosing a certain fund type. If you cannot take on high-risk exposure, then you can simply opt for a low-risk investment fund. Then, you need to consider the fund options offered by a certain insurance provider. As this can vary from one insurer to another it is best to assess them before picking a suitable one. But how do you assess these investment funds? Let’s find out below:
- Take downside capture ratio into account
The downside capture ratio is the measure of how a fund has performed when the market was down. Such a figure is useful in evaluating the performance of a fund versus the benchmark when the index was giving negative returns. Thus, the downside capture ratio of a fund reveals how much of the benchmark’s downside it captured during down-market.
For example, if the downside capture ratio is 80 for a fund, then it means the fund captured 80% of the downside of the benchmark index. Hence, it fell less than the index and secured the downside risk. So, as an investor, you can assess how well a certain type of fund performed while the market was low and choose a suitable fund option.
- Consider upside capture ratio
On the contrary, the upside capture ratio tells you how a fund has performed when the market is rising and doing well. The figure shall reveal how much of the benchmark’s upside did the fund capture during the rising market. For example, if the upside capture ratio is 110, then the fund option captured 110% of the upside of the benchmark index, meaning it out-performed the index. Therefore, you can refer to this ratio to learn more about your fund type and its returns during the highs in the market.
But why should you consider both these ratios to evaluate the equity fund risk of ULIP policies? If you only consider either one, you are bound to get a one-sided view. Thus, you must determine both and get the overall capture ratio by taking the upside capture ratio divided by the downside ratio. The downside capture ratio enables you to assess the equity risk that many investors experienced during the 2008 market crash. This shall allow you to get good returns from your ULIP policy in the long run.
With this, you must have learnt what ULIP equity risk is and how to assess it to safeguard your investment. Though equity funds come with high risk due to increased market volatility, you can earn lucrative returns if you can afford the high-risk exposure. If you still haven’t purchased the plan, now is the time to invest in a ULIP policy and gain coverage. Ensure to check out the ULIP calculator to estimate your returns beforehand and plan your profits!
