So have unit linked plans - the much talked about high-return offering product of late taken your fancy?

Wondering what it is all about and how unit linked plans are able to offer a comparatively better return on your investment?

While they are not a totally new concept considering that the Indian investor is familiar with mutual funds that have been around for some time now, as far as insurance goes, unit linked has all of a sudden caught the fancy of the Indian customer.

If you are all set to take the plunge into buying a unit linked product it would do well to know a few things about their working.

Combination of mutual fund and insurance cover:

Unit-linked plans are a combination of an investment fund and an insurance policy. A major part of the premium amount received on such policies is invested in the stock market by the insurer in select funds depending on the risk level chosen by the customer. Mind you, this is after deducting administration charges and management expenses that may vary from one fund to the other.

Choice of Funds:

The customer has the option of choosing from debt, balance and equity funds. If the individual chooses a debt fund, a major part of his premia is invested in debt securities like gilts and bonds. But if it is equity, a major portion goes towards investments in the stock market. So depending on the risk profile the individual may choose his investment option.

Survival Benefits:

As regards survival benefits the fund value as on that date is paid to the individual.

Death Benefits:

In case of death the individual is paid higher of the sum assured or the fund value standing to his account.

Fund Value:

The fund value is the value of your investment as on a given date. This is influenced by the ups and downs in the sensex. So Fund Value = Unit Price x Number of Units

Switching between Funds:

The advantage one gets in case of a unit linked fund is that the working is similar to a mutual fund. One can ship out of a fund if he feels its performance is not up to the mark. Companies allow certain number of free switches in a year. For any more switches one may have to pay.

Risk Element:

On the face of it investment in unit-linked plans are not entirely safe. An element of risk is definitely in the hands of the individual. An individual choosing to park his funds in equities stands to gain or lose depending on the bull run in the stock market. When the market is buoyant he stands to gain handsomely but on the other hand he may lose heavily when it tanks out.