Unit Linked Insurance Plans (ULIPs) have become a popular choice amongst investors in recent yearsThe reason being it provides life insurance and opportunities for investment in a single planIt ensures that your two vital financial goals — securing your loved ones and earning return on investments — with a single plan.
The insurance part of a ULIP works like any other life insurance planDuring the duration of the policy, if the policyholder loses their life, their nominee will receive a death benefitThe death benefit will either be the sum assured or the fund value of the investment, whichever is higher.
The choice of funds that you want to invest can be decided with the investment component of the planBased on your risk appetite, you can select the funds and even diversify them to mitigate the riskOnce you have selected your funds, you also need to track your investmentTracking your investment from time to time ensures that your investments are aligned with your financial goalsThe Net Asset Value (NAV) will reflect how your fund is performingRead further to understand the meaning of NAV, and how it helps in tracking your ULIP performance.
Meaning of NAV
When you buy a ULIP, your money is invested in a fund of your choiceThe fund that you choose comprises of a pool of investments and the same pool is broken down into parts, also known as unitsNAV is the value of the total assets held by a fund after the subtraction of short-term and long-term liabilities from itWhen the fund is created with a pool of investments, the number of units is decided by the fund managerThese units are then divided into the total value of the fund to arrive at the ‘unit’ NAV.
Calculation of ULIP Returns
To calculate your ULIP fund’s performance, it is important to know the premiums paid and the tenure for which it was paidTo find the absolute fund returns, also known as point-to-point returns, you need to compare the initial NAV of your fund with its current NAVHere are the steps for calculating absolute returns:
- First subtract the initial NAV of your fund from its existing NAV.
- Divide the value that you receive with its initial NAV.
- The figure that you get by division multiply that figure by 100 to arrive at a percentage value.
Absolute returns are an indicator to measure how your ULIP is performing in the short termSince in the long haul, your ULIP investments compound and you cannot get the real returns of your investmentTo track your overall ULIP fund performance, you need to calculate the Compound Annual Growth Rate (CAGR) of your fund over a period.
The CAGR is calculated using the initial value of your fund and its current value along with the number of years into considerationWhen you calculate your funds, CAGR does not consider the volatility of your funds over the yearsHence, CAGR alone cannot be used to foresee the performance of your investments in the future.
Comparing Plans with the Help of NAV
New investors often misunderstand NAV and consider it similar to a stock priceHowever, NAV is not an accurate indicator of your ULIP’s performance because NAV value alone does not determine if the fund is a profitable investment or notWhen selecting ULIP funds, NAV should never be the sole factor you take into consideration.
NAV basically reflects the performance of your underlying assetsIt is not a good indicator of the fund’s performanceInstead, you need to look for your investments keeping in mind the returns they offer and choose a fund after knowing all the informationNAV is useful when you simply want to know the performance of your fund on an everyday basisInstead of NAV alone, consider the past performance of your funds and its current asset allocation to be some of the key parameters before you invest.