ULIPs have been quite popular amongst various life insurance options due to its dual advantage of risk cover cum investment. Apart from this, investors are also able to enjoy the perks of tax-saving on the investment returns. Such features have made ULIP a go-to option for many new investors and first-time policy buyers. However, many people harbour one common question regarding the NAV in ULIPs. So, let us explain everything about Net Asset Value in ULIP along with a detailed example.
Unit-Linked Insurance Plans are a hybrid policy with a life cover plus an investment component. Part of your premium goes towards the chosen fund type to earn returns in the long term. ULIPs have a mandatory lock-in period of 5-years during which you cannot make any withdrawals. However, you can opt for a long-term option even after the lock-in gets over and continue your investment to earn lucrative returns.
There are three fund options available based on your risk appetite, namely equity, liquid and debt funds. A unique feature under ULIPs enables you to switch between fund types to suit your life stage goals. But the returns from your ULIP insurance are based on the NAV or Net Asset Value. So, what is ULIP NAV?
What Is ULIP Net Asset Value (NAV)?
The Net Asset Value in ULIP is the market value of the funds at which they are bought or sold after subtracting the liabilities. Such a value helps you understand and track the performance of your ULIP investment. The fund manager creates a pool of money with the help of various investors and uses it to invest in various market instruments. Depending on the premium paid, every investor is given a specific number of units. Here the value of each unit is termed as Net Asset Value or NAV in ULIP. The formula used to calculate the Net Asset Value is:
NAV = (Value of current assets + market value of investments held) – (Value of current liabilities and provisions) / Total number of outstanding units on the date
Let’s take an example to understand NAV in detail:
For example, there are two investors Mr. A and Miss B who have bought a ULIP insurance policy. The premium dedicated by Mr. A towards his ULIP fund investment is INR 20,000 while Miss B’s is INR 30,000. After deducting the necessary charges, the total amount invested comes out to be INR 19,500 and INR 29,500. Here, the total amount invested is INR 49,000. Thus, Mr. A is now holding 1950 units and Miss B is holding 2950 units where the total fund units are 4900.
Let’s assume the fund manager has created ULIP funds having a face value of INR 10. On day one, the NAV of the funds is the total amount, INR 49,000, divided by the total number of units, 4900 that comes out to be 10. If the total fund net value increases to INR 55,000, then the new NAV can be estimated by dividing the fund value by the units.
While calculating this, you must remember that the number of fund units shall remain constant and will not change. Thus, the new face value of each unit comes out to be INR 11.22, giving you a profit over your ULIP investment. However, this does not represent the total returns you can earn from your ULIP policy as your returns grow with the power of compounding. Hence, this example only tells you about NAV in ULIPs.
In such a way, you must have understood what Net Asset Value is and how you can easily calculate it to know your fund value. In case you are considering purchasing a ULIP policy, now is the right time to do so! However, it is recommended to opt for long-term investment with ULIPs to earn good returns from your investment. By exiting the policy early or after the lock-in period gets over, you shall stop your returns from growing. With time, the impact of various charges also reduces, thus, making ULIP the best long-term investment option.