Photo: iStock
Photo: iStock

When switching from Ulips to mutual funds, ensure you have adequate life cover

Compare the Ulip performance with similar mutual funds, i.e. if you have equity holdings in Ulips, then compare them with funds investing in equities

I have two Ulips, for which I have been paying premiums for 6 years. I want to withdraw from these and invest in mutual funds as the latter offers more choice. Is this a good move?

—Vineetha Jacob

You have been invested in Ulips and have already paid the minimum premiums applicable for 5 years. While it is good to go through the policy document, you have prima facie paid all the upfront charges applicable for the initial premium payment years and now with the said term being over, you need to evaluate the policy from the performance perspective net of charges as well as factor in the guaranteed accruals as well as loyalty additions, if any, which are typically added in the latter part of the policy years. Compare the Ulip performance with similar mutual funds, i.e. if you have equity holdings in the Ulips, then compare them with mutual funds investing in equities. Mutual funds’ performance is net of charges and hence it would be easy for you to compare and decide.

In case you decide to switch to mutual funds, do ensure you have adequate life cover in the form of a term insurance plan.

While both my parents are covered under ECHS, I would like to build a corpus for their health-related expenses such as nursing assistant or long-term physiotherapy. I would prefer stability over high returns. What would be a good way to build this fund?

—Roopesh Mahapatra

Medical care is a critical aspect for any financial planning considering health inflation. A medical treatment which costs Rs5 lakh today will be equal to Rs12.44 lakh five years from now. While it may not turn out be so expensive, it is good if we plan accordingly. For medical planning, it is good if you create protection in multiple layers.

The first level of protection is by having a health insurance and increasing the sum insured every few years in line with health inflation. Many insurers also increase the sum insured every year in case of no claim. And the second layer, by creating an emergency corpus for any medical needs which could be over and above the sum insured or it could be for treatment which may not be even covered by an insurance policy like long-term physiotherapy or even keeping a nursing assistant. This has become a reality in today’s time and age with increasing life expectancy. So it is good if we try to create this medical fund along with our other financial goals.

If this fund is to be planned for parents, you have to consider you might need these anytime but along with medical insurance. This corpus is to be invested with focus on liquidity followed by safety and returns. You can even start an SIP or put a lump sum or both depending on your financial well-being. A combination of short term and hybrid equity balanced funds can be used to create this corpus.

I recently quit my job to work as a freelancer. Since there won’t be any more contributions to my provident fund (PF), can I invest in a similar manner so that my retirement corpus is not affected? What alternatives do I have?

—Killol Mathur

There are many investment options in lieu of your investment in PF. The intent being long term, i.e. creating a retirement fund, you can consider NPS (National Pension System)—a defined contribution retirement scheme where you can create a long-term retirement pool with the added advantage of equity exposure. Being a long-term investment, it’ll also provide inflation-adjusted returns. In addition, you can consider mutual funds and go for equity and equity-oriented options. In both the alternatives, you can start monthly investments of a fixed amount as well as lump sum.

In case your freelancing work gives you the option of a fixed monthly income, SIP (Systematic Investment Plan) is recommended wherein a fixed amount will be contributed by you every month in a specified fund.

While equity is the recommended asset class for long term, it is good for you to understand the risks attached with equity investments along with the advantages. Like PF, these schemes also give tax advantage under Section 80C, subject to a cap of Rs1.50 lakh. NPS too gives a tax advantage of Rs50,000 under Section 80CCD.

Surya Bhatia is managing partner of Asset Managers.

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