Before you invest in a financial product, it is important to be thorough with all the terms and jargon associated with the product. This not only helps you choose a better product but also ensures that you have an overall, smooth experience with the product. In the case of ULIPs, one such important term is the NAV or the Net Asset Value. In simple terms, the NAV is the value of each unit of your ULIP fund. It is the NAV of your ULIP investment that ultimately decides the amount of returns you will receive. The higher the NAV of your ULIP policy, the higher will be the returns you can enjoy. Let’s learn more about the ULIP NAV in detail.

What are ULIPs?

ULIPs are Unit-Linked Insurance Plans. The premium of a ULIP is used by the insurance company for two major purposes: to build the life coverage you want and to invest in market-linked instruments or debt funds as per the goals you have set.

ULIPs are similar to mutual funds; funds from several policyholders are pooled together by the insurance company and invested in specific funds. You can choose from equity funds, debt funds, and a combination of both. The NAV also depends on the kind of fund you choose. You can get an idea of the returns you could receive from both types of funds with the help of a ULIP return calculator.

Understanding NAV in detail

Depending on your share of the pooled fund that the fund manager invests in the market, you are allotted a specific number of units. The return on the investment is distributed amongst the policyholders based on the number of units they hold. The value of each unit of your investment amount, after the liabilities associated with the policy have been deducted, is referred to as the Net Asset Value of the fund.

How is ULIP NAV calculated?

The NAV is calculated every business day. The formula used to calculate the NAV works in the following manner:

(Market value of the investments held + the value of current assets) – (value of liabilities, charges, and expenses) / the total number of units held by you = ULIP NAV.

Let’s use an extended example to illustrate this formula:

Two individuals, Asha and Harsh, buy ULIPS with a premium of Rs 60,000 and Rs 50,000 respectively. The insurer deducts the initial ULIP charges such as mortality charges, and the amount for investment comes to Rs 59,500 for Asha and Rs 49,600 for Harsh.

Now, the sum total of this amount, which is 1,09,100, is invested in the market. The face value of the investment, as decided by the fund manager, is Rs 10 per unit. Thus, the total number of units will be 10,910. As per the contribution of each investor, Asha holds 5,950 units with her ULIP policy, while Harsh holds 4,960 units.

Now, after a while, the investment performs well and begins bringing in the results. Let’s assume the investment rises to Rs 1,25,000.

So, now, the value of each unit of the fund is calculated thus: (1,25,000 /10,910) = 12.26. Asha and Harsh will thus enjoy the returns as per their share of the investment amount.

Is the NAV of a ULIP the only important factor? 

The NAV is not the only determinant of how useful a ULIP policy can be for you. Yes, the returns on your ULIP policy are the main reason you purchased the product. But there are various other benefits and features of a ULIP that make it immensely beneficial for every type of investor.

  • Life coverage

One must never underestimate the importance of having a life cover and the level of peace it can bring to one’s life. With a life cover, you get the assurance that, even in your absence, your loved ones will not face any financial difficulty.

  • Tax benefits

The premium of your ULIP helps save on tax (up to Rs 1.5 lakhs) while the pay-outs are tax exempted.

  • The option of fund switching

You can switch your investment from equity to debt and vice versa if you feel that a particular asset class is not suitable for you, in terms of risk or profit. A ULIP return calculator can help you in planning a long-term strategy to maximise your benefits.

Always read the terms and conditions of your ULIP policy before signing and going ahead with it.

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