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Unit Linked Insurance Plan or ULIP is one of the popular investment tools that has recently gained popularity after the new regulations that the government brought in Budget 2022 to control its misuse. Investors now find ULIP as a good long-term investment tool that offers dual benefits of insurance and investment in a single premium. Also, ULIP returns are decent, making them a good choice for investors. However, it is important to understand the key details about ULIP before planning an investment in this plan.
Calculation of returns is a crucial factor that one must be aware of in any financial plan as an investor. However, there are some financial plans in which hidden costs are involved; the investor is unaware of it and wrongly calculates the returns.
If you were wondering about calculating ULIP returns, or about how are ULIP returns calculated, you have landed at the right spot. We will discuss ULIP performance, benefits of ULIPs, best ULIP Plans in India, and the tax advantage of ULIPs in brief.
ULIP is a 2-part investment plan. This means that one part of the investor’s premium is allocated towards insurance. In contrast, the remaining premium amount goes towards investment, which manages portfolios of different market funds like debts, equities, hybrid funds, etc.
The investor manages the investment part, and the return depends on how the fund portfolio is managed. The whole calculation of the return is based on the NAV of the whole ULIP policy.
NAV or Net Asset Value is the value of assets of your ULIP funds excluding its liabilities. Another term used to denote NAV is book value.
ULIP NAV Formula:
NAV = (Value of Current Assets + Market Value of Investments Held) - {(Value of Current Liabilities & Provisions) / Total number of outstanding units on the date (before redemption/creation of units)}
The NAV is calculated on a daily basis as the value of market funds change every day.
To check ULIP performance, it is important to understand how the value of ULIP is calculated. The simplest way to calculate the value of ULIP returns is to use an online ULIP return calculator.
However, at times these calculators provide very limited functionality, and if you want to calculate the exact value of your ULIP, you will have to calculate it on your own.
Choose a date for valuation that fits your needs. (As NAV is calculated on the fund valuation of a particular date)
Now, calculate fund securities using the formula below:
Total Value of Fund Securities at the end of valuation date = (Cash on Hand on valuation date) + (Short-term and Long-term assets held by the fund)
Subtract outstanding liabilities of ULIP Funds. Use the formula below for this:
Total Value of Fund Securities at the end of valuation date = [(Cash on Hand on valuation date) + (Short-term and Long-term assets held by the fund) - Outstanding Fund liabilities]
Now divide the value obtained above by the outstanding share in your ULIP funds. You will get:
NAV = [(Cash on Hand on valuation date) + (Short-term and Long-term assets held by the fund) - Outstanding Fund liabilities] / number of outstanding shares in the ULIP fund
Thus, the final NAV of your ULIP fund is obtained.
To obtain the market value of your investment, you will have to multiply the NAV value obtained above the number of shares you own.
The total market value of investment = NAV x Number of shares owned
Having understood calculating your investment’s market value, you can calculate the exact value of your ULIP investment and plan your next moves accordingly. Moreover, you will not have to depend on the limited features of the online ULIP return calculator to check your ULIP performance.
ULIP can be considered a good option as a financial tool. However, among various benefits of ULIPs, like good returns, one of the most important ones is the tax advantage of ULIPs. Therefore, checking these benefits, calculations, and deductions is suggested before opting for a ULIP policy.
- A Consumer Education Initiative series by Kotak Life
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