The portfolio should be designed depending upon the risk appetite and horizon of investment of an individual
Suresh Agarwal, President, and Chief Distribution Officer, Kotak Life Insurance explain the different types of funds that are generally available with a ULIP to invest in. He gives an insight into which fund suits what type of risk appetite and how long should one remain invested in an interview with Nirmala Konjengbam. Edited excerpts.
What are the different types of funds available with ULIP?
There is a wide range of funds available in unit-linked products. The funds can be designed to exposure only in equity, debt, balanced (a mix of equity and debt), and money market instruments. At Kotak Life, we have an entire range of funds. There are also investment strategies available that allow the policyholder who is not actively tracking the market to gain from the expertise of our investment team.
How would you rate these funds on the scale of being risky, moderate, and safe?
Given that the funds are market-linked, depending upon the kind of asset class the fund falls into they would be rated as either risky, moderate, or safe. Typically, equity funds have higher volatility and thus the potential to provide both higher returns and be impacted by the market downturn. Having said that, at Kotak Life, we have a very strong investment team and we actively track and manage the investment in the appropriate portfolio and thereby provide better returns. Debt and money market funds are classified as moderate to safe funds.
What sort of funds portfolio would you recommend for someone who is investing in ULIP?
The portfolio should be designed depending upon the risk appetite and horizon of investment of an individual. I would always recommend a longer investment horizon, anything above 10-15 years and a mix of investment in equity and debt as that would enable the multiplier effect on returns and some stability as well.
How does the portfolio change according to the age of the buyer?
For higher ages, the investment in the equity funds goes down as they look at having lower volatility and moving the gains to other funds such as debt or money markets.
Are customers allowed to switch funds? How often can they switch between the funds? Will they be charged for switching the funds?
Yes, the policyholders are allowed to switch between any category of funds as per their choice. The switch can be made as many numbers of times as the policyholder wants to. In our ULIPs, 12 switches in a policy year are available without any charge (terms and conditions vary from insurer to insurer). This is with the premise that even if a policyholder makes one switch every month (which is very rare) there is no extra charge for the policyholder. Also, there is an age-based strategy that has a pre-defined switching mechanism based on age, risk appetite, and tenure of the policy. In this strategy, there is rebalancing between equity and debt funds on a periodic basis to lock in the gains and ensure corpus creation.