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Bond Funds – Investing in ULIPs through Bond Funds

Bond funds or debt funds are a kind of investment offered under the Unit Linked Insurance Plans (ULIPs). With ULIPs, you can seek the benefits of investing in funds of your choice as well as get the benefit of life insurance. Under a ULIP, a part of your premium amount is used for insurance while the remaining portion is invested in funds. Now, these funds can either be equity-oriented, debt funds, or a combination of the two. Investors with a low-risk appetite and who want steady returns on their ULIP plans should consider investing in debt funds. In this article, we’ll take a look at bond funds as optional investments for ULIP.

What is a Bond Fund?

In simple terms, bond funds are basically like mutual funds that solely invest in bonds. For most investors, buying a bond fund is a much more efficient way of investing than buying individual bonds. Bond funds are maintained by professional investors, and this also reduces the risk of losing money to a small extent. Unlike individual bonds, bond funds do not have a maturity date for the repayment of the principal, so the principal amount can fluctuate over time.

Here, the main objective is to gain an income stream for everyone investing in the scheme. Hence, the insurer will invest your money in fixed debt securities like government securities, corporate bond funds, Government Issued Long-Term Stocks (GILTS), bonds, debentures, bond mutual funds and fixed deposits. The concept of bond funds was developed under ULIP investments, mutual funds and other investment companies.

Types of Bond Funds

The bond funds come in various types but generally fall under the following categories –

  • Short-Term Bond Funds

For those investors who have a short investment horizon of less than a year.

  • Ultra-short Bond Funds

These are bond funds that are invested in securities with extremely short maturities.

  • Medium-Term Bond Funds

It is ideal for people with an investment horizon of at least three years.

  • Government Securities or Gilt/Dynamic Bond Funds

These are also known as G-sec funds and are born out of government securities.

  • Fixed Income Funds

Fixed income funds are a type of bond fund that gives out a regular income at fixed intervals.

Note that bonds and Government securities come with either long-term or short-term maturities to gain maximum ULIP returns. These are also known as dynamic bond funds.

How Does A Bond Fund Work?

Since you (the investor) may have a low-risk appetite in the beginning, bond funds are expected to earn steady returns. Your fund manager will invest in fixed income securities with high credit rating and established financials. This thus reduces any risks in repayment of capital and interest.

Like we mentioned earlier, the primary objective of bond funds is to earn you income. And this is achieved in two ways –

  1. Capital Appreciation: Here, the bond fund NAV (Net Asset Value) increases over some time.

  2. Dividend Pay-out: Here, you will receive pay-outs at regular intervals depending on the surplus fund.

Let’s use an example to understand the working of bond funds: 

Consider that a corporation like Ford Motor Company is offering bonds that pay 7 percent interest for 30 years. You (the investor) decide to purchase INR 10,000 worth bond funds. You will receive a bond certification in return to confirm your purchase. Then, you will keep receiving 7 percent interest which is INR 700 for the next 30 years. By the time the policy matures, you will receive the principle amount INR 10,000 along with the interest amount earned.

Advantages of Bond Funds

Here are the main advantages of bond funds that you should be aware of:

 

  1. Bond funds are very attractive investment options for investors as it’s more financially efficient to purchase a bond fund that is managed by a professional than to buy individual bonds of different companies.

  2. Bond funds are a type of investment that can help investors diversify their portfolios and reduce the overall risk as they consist of multiple bond securities.

  3. These can be sold at any time in the markets for their asset value at the given moment in time so they are a liquid form of investment.

  4. Bond funds allow the investors to have a regular income stream through dividends and monthly returns.

  5. Purchasing bond funds as a part of ULIP ensures that you get the advantage of investing in bond funds as well as life insurance cover.

Risks of Bond Funds

Here are some risks of owning bond funds you should be aware of:

 

  • Uneven interest rates affect prices

As the prices of bond funds are dependent on the interest rates, the net values of bond funds usually fluctuate.

  • Credit Risk

If you have invested in a bond fund containing low-quality individual bonds that have a high credit risk, then the returns on your bond funds and their value may not be satisfactory.

  • Net Asset Value

As mentioned previously, the net asset value of bond funds fluctuates. Hence, if you need to sell your bond fund in an emergency and the net asset value at that time is lower, you may have to sell the bond fund at a lower value. 

ULIP Calculator

People usually wonder how much money they will receive after their ULIP plans matures. This is when a ULIP calculator comes into picture. This tool is specially designed to help you and other investors to calculate the premium amount and check the ULIP returns. Based on the input – the premium amount and policy tenure – the ULIP calculator will calculate the ULIP returns offered by the plan you have chosen.

The Bottom Line

For those who have little to no understanding of how the share market works, can begin their investments with bond funds and seek ULIP benefits. After a while, you can move on and switch to equity-oriented funds to yield higher returns.

Investing in Bajaj Allianz Life’s exclusive ULIP plans available on Finserv MARKETS has dual-benefits, allows you to build your wealth over time, offers tax-benefits, provides protection for self and loved ones, and more.

So, don’t wait. Start your investments with ULIPs at Finserv MARKETS and grow your wealth over time.

Also, you can read about fund switching for ULIP plans by visiting us our online portal. This will help you to maximize your gains in the long run.

FAQs on Bond Funds

  • ✔️What is a bond fund?

    A bond fund is a type of mutual fund that only invests in bonds. Bond funds are managed by a professional fund manager who curates the best bonds to be put in the bond funds. 

  • ✔️Which are the best corporate bond funds in India?

    It is a good idea to consult a finance expert or a bond fund manager to get a good idea of the best corporate bond funds in India. 

  • ✔️Can I lose money investing in a bond fund?

    Yes, there is a small and rare chance that you may end up losing money if the net asset value of the bond fund goes down.     

  • ✔️What is an ultra-short bond fund?

    An ultra-short bond fund is a type of fund that only focuses on securities that have extremely short maturity periods. 

  • ✔️Can I invest in bond funds with ULIPs?

    Yes, in some cases, one of the options of investments in ULIPs is bond funds that you can choose as your form of investment. 

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