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If you have a mediumterm goal, always go for conservative funds as these will ensure a decent return and no loss of capital

IT IS a widely known fact that money invested in equity will generate far better returns in the long-term than other financial instruments. But investing in equity comes with its own set of risks, due to the volatile nature of these investments. In an uncertain economic environment, people are increasingly looking for investments that maximise returns and also safeguard against life's uncertainties. Unit-linked insurance policies (Ulips) are one of the better ways to achieve these twin objectives. Despite the apprehension surrounding investment in these plans, it would be difficult to find better products in terms of return on investment.

The problem consumers face is choosing the right fund for their Ulips. Most of the time, these products are bought on the advice of the agent adviser without ascertaining if the product suits a consumer's needs or not. The problem is compounded when consumers see that many funds have similar objectives. For example, if an investor's objective is to preserve capital and gain returns, there are scores of funds that claim to do precisely that.

Therefore, it is imperative for customers to find out which type of product suits them and make a decision based on clear understanding of their needs and the product's features.

Major types of funds offered with Ulips:

Life insurers offer wide varieties. However, they can be broadly divided into three major types: Growth/aggressive funds: These funds invest major part of their money in equities. Since equities are the ris ties. Since equities are the riskiest investment of all, these funds entail high risk.

The objective of such funds is to provide capital appreciation in the long run.

Balanced funds:

These funds invest equal amount of money in equity and bonds. Since a significant part is investment in bond, the returns are low compared with aggressive fund. However, this also makes it less risky. The objective of these funds is to provide moderate returns by taking moderate risk.

Conservative funds:

 Conservative funds invest major part of the fund in bonds. Since bonds provide fixed return, these funds are considered safest of the three. The return is also low because of higher proportion of bond.

Choosing the right fund:

Following are the three most important driving factors to choose the right fund category: Your objective: Your choice of funds should represent your objective. If you have a medium-term goal, you should invest in funds that are conservative as these funds will ensure a decent return and no loss of capital. However, if you want to invest for a longer term, investing in an aggressive fund is advisable.

Balanced funds are ideal for investors with a mid to long-term investment horizon.

Investment period: A younger person has a longer investment horizon and, hence, can afford to invest a larger portion of his or her savings in growth / aggressive funds. An older person would rather invest in conservative funds in order to preserve his capital.

Typically, a person of 30 years should invest 60-70 per cent of her/his money in equity-oriented funds, while a person of 50 years should invest 60-70 per cent in conservative funds.

Risk appetite:

The appetite for risk may differ from person to person, irrespective of the age or the life stage of the individual. Even a young investor may not invest a majority of their savings in equity funds if he/she is risk averse by nature.

Today life insurers offer various options such as systematic transfer of funds that ensure that the consumer's investment hits the market in 12 equal instalments. It works on the concept of rupee cost averaging and, thus, makes the volatility in the market work to one's advantage. This ensures the purchase of more units for same amount at lowered prices thus lowering average purchase price.

In a nut shell, deciding to invest in the right fund is a function of one's risk profile, financial condition, understanding the nitty-gritties of financial instruments and planning with an objective. Ulips are a great way to build wealth for passive investors who either do not have time to study the businesses, or do not have enough knowledge to take right decision.

Happy Investing!!

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