Unit-linked Insurance Plans (ULIPs) offer life coverage as well as investment benefits. A portion of the premium is used to provide insurance coverage. The balance is invested in debt, equity, or money market instruments.

The returns on ULIPs are not fixed and are related to the performance of the underlying assets. There are certain inherent risks to ULIP investments and you need to understand the market dynamics. It is important to know where to invest and the right time to invest.

You may opt for a balanced fund that delivers decent returns with no risks. However, there are several options that may be used to mitigate the risks and manage your ULIP investments to maximize returns.

Following are four tips to help you become a smart ULIP investor:

1. Redirecting the premium

Insurance companies allow you to redirect your future premium to funds that are different from the ones you choose at the time of purchasing the ULIP policy. When you opt for such redirection, the existing units are not affected. In case the market performance is not as per your expectations, you may redirect the premium to low-risk funds.Moreover, as you accumulate more units and near your retirement age, you may redirect the premium to balanced funds, which are almost risk-free and deliver decent returns on your investments.

2. Using the switch option

Most insurers allow you to switch from one financial instrument to another when you purchase a ULIP. This is a beneficial and convenient method to protect the ULIP returns against market variations. If you expect the stock market to dip, you may consider switching from an equity fund to a balanced fund. The latter can invest 60% in equities and balance in debt instruments. In the same way, as you approach your investment goal, you may shift a significant part of your ULIP investment to a debt or balanced fund to protect the returns against market fluctuations. This will help protect the accumulated corpus that may be used to meet your financial objective. However, insurers offer a limited number of free switches during a year and it is important you know this beforehand to ensure you make the right investment decisions.

If you do not have the time or the skills and knowledge to make such investment decisions, you may choose the automatic asset allocation option. On your behalf, an experienced and professional fund manager makes the investment decisions. He/she makes the switches based on the market performance and conditions.

3. Balance your investments based on your life stage

Financial experts recommend that you make your investment decisions based on your life stage. If you are young and do not have many responsibilities, you may choose to invest in equity-oriented ULIPs. As you grow older and have more responsibilities, you may balance your investments between equity and balanced funds. Similarly, as you near your retirement age, you do not want to lose your accumulated corpus due to a market dip and investing in debt-related instruments is advisable. It is crucial you make your investment decisions based on your risk profile and financial goals.

4. Comprehend the economic situation

It is important you keep track of your investments and the overall economic situation. If the stock market seems overvalued, consider switching to other funds. Moreover, you must consider re-switching only when the stock markets have seen significant corrections. You must also periodically review and monitor the performance of your investment portfolio. This will allow you to make any modifications that may become necessary.

ULIPs are transparent and provide complete details on various expenses and charges. Insurance companies publish the net asset value (NAV) on a daily basis, which allows you to choose top-performing ULIP funds. It is recommended that you analyze the past performance of various funds to make a smart investment decision. Here are the four types of ULIPs:

1. Equity funds

The fund corpus is invested in listed companies with the primary objective of delivering higher returns through capital appreciation. However, these funds are very risky, wherein you may lose your entire capital.

2. Debt funds

A majority of the money is invested in debt instruments, such as government securities, company bonds, and other fixed-income products. These funds have a medium risk profile.

3. Secured funds

Also known as cash funds, investments are done in money market products and bank funds. Secured funds are low-risk.

4. Balanced funds

Such funds invest the corpus in equity as well as fixed-income financial instruments. These are medium risk funds.

ULIPs have a minimum lock-in period of five years.However, it is recommended you stay invested for longer to maximize your returns. Such investments are a long-term option and you need to remain disciplined and committed to ensure that you earn higher returns.

You must also be attentive to the asset allocation in your overall portfolio. This ensures that if a particular investment does not perform well, the downturn is offset by the performance of other financial instruments included in your portfolio. ULIPs give you the option of having such portfolio diversification. More importantly, when you invest in ULIPs, you have investment versatility, which makes it an excellent product to include in your portfolio.