Switching

Switching is transferring or changing investments from one fund to another. Switching is initiated depending on the returns expected.

Switching is a feature associated with Unit Linked Insurance Plans. In these life insurance-led investment plans, a part of the premiums paid by the policyholder is consumed to provide life cover and the rest is invested in market-linked products to gain returns. What do we mean by market-linked products in ULIPs? These are multiple fund options broadly divided into two categories known as equity funds and debt funds.

As these are market-linked investments, the returns may vary depending on market movement. So sometimes the investors may not get the expected returns. Or sometimes the investors’ risk tolerance increases to get more returns by investing in equity funds and vice-versa. In such scenarios, life insurance companies offer the flexibility of switching between fund options.

Policyholders can dump an existing fund to choose a new fund option according to their varying financial needs and goals and market performance. Switching funds is generally free of cost until a few switches as per the policy, but it may attract charges to make switches beyond limits. Aggressive investors make use of this feature more than conventional investors.

Pratham bought a ULIP plan when he was 36 years old. He paid a premium of Rs.30,000/- every year. Under the policy, half the premium he paid was invested in equity funds as he wanted high returns. While the other half of the premium was kept as a reserve for the life cover.

After 10 years of the policy, Pratham decided to switch between the funds. He had a family and thought that being risk averse might cost him. This is why he chose to switch funds as he wanted stable returns. So from equity, he switched money to debt funds.