Unit Linked Insurance Plans (ULIPs) have become a popular choice amongst investors in recent years. The reason being it provides life insurance and opportunities for investment in a single plan. It 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 plan. During the duration of the policy, if the policyholder loses their life, their nominee will receive a death benefit. The 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 plan. Based on your risk appetite, you can select the funds and even diversify them to mitigate the risk. Once you have selected your funds, you also need to track your investment. Tracking your investment from time to time ensures that your investments are aligned with your financial goals. The Net Asset Value (NAV) will reflect how your fund is performing. Read 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 choice. The fund that you choose comprises of a pool of investments and the same pool is broken down into parts, also known as units. NAV is the value of the total assets held by a fund after the subtraction of short-term and long-term liabilities from it. When the fund is created with a pool of investments, the number of units is decided by the fund manager. These 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 paid. To 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 NAV. Here 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 term. Since in the long haul, your ULIP investments compound and you cannot get the real returns of your investment. To 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 consideration. When you calculate your funds, CAGR does not consider the volatility of your funds over the years. Hence, 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 price. However, 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 not. When selecting ULIP funds, NAV should never be the sole factor you take into consideration.
NAV basically reflects the performance of your underlying assets. It is not a good indicator of the fund’s performance. Instead, you need to look for your investments keeping in mind the returns they offer and choose a fund after knowing all the information. NAV is useful when you simply want to know the performance of your fund on an everyday basis. Instead 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.