Whether you are investing in market-linked instruments or risk-free options, it is important to have a benchmark against which you evaluate your returns. If you are looking for a simpler approach to such an evaluation, then you can try calculating the fund’s absolute returns. However, for a product such as a ULIP plan, one needs a more concrete figure. This can be achieved with the help of the NAV or the Net Asset Value calculation. The NAV is a fool-proof way of understanding the returns that your funds are getting. The higher the NAV, the more will be the returns you will receive with your ULIP plan. This article provides a detailed overview of the ULIP NAV.
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How does a ULIP work?
To understand the NAV, one must first get to know how ULIPs work. In a ULIP or a Unit-Linked Insurance Plan, the premium is used for two purposes: for building the life cover and for investing in the instruments of your choice. You can choose from equity funds or debt funds as per the objectives you have set and after estimating the returns from the ULIP plan calculator.
The investment portion of your premium is merged with the money from other policyholders. The accumulated amount is then invested into the chosen instruments. To specify each investor’s share of the investment, the fund manager will divide the corpus amount into units with a certain face value. The manager will then assign you a number of units as per your contribution to the investment. The value of each such unit is its NAV, once the liabilities have been deducted.
How does one calculate the NAV?
The insurance company calculates the NAV at the end of every business day. This is the process that the insurer follows:
- The insurer calculates the value of all the units held in the fund.
- After arriving at the total, the insurer then subtracts the expenses and the liabilities from it.
- The new figure is then divided by the total number of units in the fund.
- What emerges is the NAV of the ULIP.
The NAV, thus, indicates the market value of the units that you hold. When your policy reaches its maturity or you surrender it, the returns you receive are determined on the basis of the NAV.
Here is how the Net Asset Value is calculated:
(The value of current assets + market value of the investments held) – (Value of current liabilities and expenses) / total number of units in the fund = NAV of the ULIP plan
An extended example might help you understand the concept more clearly:
Two friends, S and V, buy ULIPs. S invests Rs 70,000 and V invests Rs 80,000 in their respective ULIP plan. The insurance company deducts the applicable charges from their investment and the consequent figures are Rs 69,100 and Rs 79,000 for S and V respectively.
The total amount for this investment is thus Rs 1,48,100. This money will be invested in the market as per the instruments chosen by S and V. To better facilitate the distribution of returns, the insurer creates units with a face value of 10 rupees. The total number of units in the fund is 14,810. As per this arrangement, S holds 6910 units and V holds 7900 units.
As the fund performs well in the market, it gains a considerable amount of returns. This increases the net value of the fund to 1,70,000. Now, the expenses and the liabilities will be deducted. The new figure then arrives at 1,68,000. The NAV is calculated in the following manner:
1,68,000 (total value of units) / 14,890 (total number of units) = 11.28 (net asset value of each unit)
So, the returns that S receives is: 6910 x 11.28 = Rs 77,944.
The returns that V receives is: 7900 x 11.28 = Rs 89,112.
However, do note that the NAV is not the only indicator of how good a ULIP plan is. You should also look at the ULIP charges, customer service, and life insurance coverage, amongst other things, before investing. You should also use a ULIP plan calculator to modify the variables and curate a ULIP plan that meets your needs while ensuring high returns.