ULIP (unit linked insurance plan) is one of the most versatile financial instruments in India that offers multiple benefits. Primarily, a life insurance policy, it provides financial protection to your family and gives you the opportunity to invest in the money market and grow your capital.
When you pay the premium for a ULIP plan, the insurance company divides it into two parts. One part is used to invest in the market and generate returns for you. The second part is used to provide the sum assured that the insurer pays to your family members in the event of your unfortunate demise during the policy period.
The returns you get from ULIP determine its performance. Hence, as an investor in ULIP, it is paramount to understand how the insurance companies calculate the returns.
What are absolute returns in ULIP?
In simple terms, absolute return means the change in the value of the asset over a period. It is not affected by any benchmark index and can be either positive or negative. When the value of the asset increases over a specific period, the absolute returns are high and vice versa.
Absolute returns are point to point returns, which is measured from the date of purchase to a specific date in the future, usually the maturity date, like 5-years, in case of ULIP.
Calculating absolute returns in ULIP
Positive absolute returns in ULIP means you have generated profits, i.e., the value of your assets has increased from the date of purchase to the date when you compute the returns. In contrast, negative absolute return means you have incurred a loss.
To calculate absolute returns in ULIP, you must know the current Net Asset Value or NAV of the ULIP plan and the NAV at the time of purchasing the plan. Once you have these numbers, you can use the below steps to compute the absolute returns.
- Subtract the initial NAV from the current NAV
- The figure you get from the above step, divide that by the value of the initial NAV and then multiply by 100
- The result you get is the absolute returns you have earned from ULIP investment
Here is a simple formula:
Current NAV of ULIP – Initial NAV / Initial NAV of ULIP x 100
Let us understand the calculation better with an example.
Let us assume that the NAV of the ULIP at the time of purchase is Rs. 70. After one year, the NAV increased to Rs. 120. So, putting these figures in the above formula:
120-70/70×100 = 72.4%
You can also use the ULIP calculator to compute the absolute returns of ULIP.
What are the different factors that affect absolute returns in ULIP?
- ULIP-related charges
When you buy a ULIP plan, the insurance companies levy certain charges, such as fund management fees, premium allocation charges, mortality charges, policy surrender fees, etc. These charges take away the returns. Thus, if the profits earned from the ULIP investment are not more than the charges incurred, then you will end up with a loss.
Read more about different types of charges in ULIP.
- Market performance
This is another critical factor that affects the absolute returns in ULIP. You would be aware that ULIP is a market-linked financial instrument. This means the choice of your fund can have a significant impact on the returns. Hence, investment advisors suggest maintaining a balanced portfolio with investments in both debt and equity funds.
You can take advantage of the fund switching option in ULIP to ride the market volatility and increase your chances of getting higher returns. Also, it is pivotal to check the past performance of the funds before making an investment decision.
ULIP is an excellent investment option that allows you to achieve your various long-term goals. It offers valuable returns over time, and the premium is quite affordable. So, now that you know how the returns are calculated in ULIP, do your due diligence and start investing in it now.
Click here to know more about ULIP Plans: https://www.kotaklife.com/online-plans/ulip-plan