Unlike traditional insurance policies, Unit Linked Insurance Plans or ULIPs are insurance policies that have dual features — one, life insurance coverage, and second, investment. Hence, a ULIP policy is also known as an insurance-cum-investment policy. When buying a ULIP you can get access to financial coverage for your dependents, and also, the investment avenues to meet your financial goals.
A ULIP policy essentially works by apportioning a certain percentage of your premium towards providing life insurance cover, whereas the balance amount is invested in market-linked securities. These securities can either be equity funds, debt funds, balanced funds, liquid funds, or cash funds. Depending on your risk appetite and time required to achieve financial goals, you can choose to invest in the right type of investment.
Before selecting any fund, it is important to evaluate its performance. There are various funds that can be opted for, but only after a careful evaluation, can you determine which fund will help you reach your wealth creation objective.
But how does one evaluate the fund’s performance? The most common way to assess the performance of a fund is to look at its Net Asset Value (NAV). Tracking the NAV’s past performance can be a helpful indicator for estimating future growth and whether it will help to meet your financial goals.
What is NAV?
ULIPs accumulate investment from likeminded policyholders and create a pool of investment. This investment pool is then invested in an appropriate fund. The policyholders are awarded units in return, since they have contributed their part to the larger investment pool. This is similar to how mutual funds work, except that the investment is accumulated from policyholders.
Fund managers are specifically appointed to manage these investments. The net value of assets is calculated by reducing the liabilities from the assets that are accumulated for the specific fund. Once the investment fund is created, the fund managers divide the net assets of the fund by the units allocated to the policyholders.
How does NAV work?
- A fund is created to meet a specific investment objective, by pooling a number of policyholders.
- These policyholders are awarded specific units which are based on the contribution to the total investment pool.
- The total fund value as reduced by its liabilities are then divided by the number of units to arrive at the NAV of the fund.
- The units in this fund are awarded based on the amount of your investment.
How is NAV calculated for a ULIP policy?
Calculating the NAV of the fund is an important metric that helps track performance of the fund. Each fund has a specific NAV and is calculated as follows –
- The market value of all the investments held by the fund is calculated.
- The current assets held by the fund are added to the above to arrive at the total assets of the fund.
- From the above total assets of the fund, both long-term and short-term liabilities are subtracted to arrive at the net value of assets for the fund.
- This net value of assets is then divided by the number of outstanding units to arrive at the NAV of the fund.
This NAV can be used to track performance or compare several funds amongst themselves. Mathematically, the formula for NAV can be expressed as follows:
NAV =(Market value of all investments + Value of current assets held) – (Long-term and Short-term liabilities)Total number of outstanding units of the fund
How to monitor and track your investment in ULIP funds?
The NAV, as computed above, is crucial to know how the fund has performed in the past. All assets of the fund, both liquid and illiquid, are considered while computing the NAV. This gives an estimate about the total assets under management, which is important to decide when selecting one.
Here’s how you can track your investments –
Assume that you pay a premium of ₹2 lakhs to purchase a ULIP policy that invests 50% of your premium in market-linked funds. So, you end up investing ₹1 lakh in a fund and its total value reaches ₹1 crore.
From this amount of ₹1 lakh, charges are deducted, which come to ₹2000, and the balance amount is then invested in the fund. Considering that the fund manager has set the face value of each unit to ₹10, you get 9800 units (98000/10).
Now, if the value of the fund increases, the NAV of your fund will also increase. The higher the NAV gets after buying, the better performing is your fund. For instance, the net asset value of the fund increases to ₹1.1 crore; the NAV for your investment increases to ₹11 (₹1.1crore/10 lakh outstanding units).
Now, to determine the market value of your investment, you can multiply the NAV of your fund with the number of units you hold. In the above case, it is ₹1,07,800 (₹11*9800 units)
Calculating the NAV isn’t a manual process each time. Instead, the insurance companies publish the NAV of the fund, and you can see it up. You can also make use of a ULIP calculator, which is a free tool available on an insurance company’s website, to not just compare NAVs across funds, but also, to compare ULIPs.