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How To Track The Performance Of ULIPs

How To Track The Performance Of ULIPs

performace of ulip

A Unit Linked Insurance Plan (ULIP) serves the dual purpose of providing a life insurance cover and investment returns. In a unit linked plan, the insurance company sets aside a portion of the insurance for life cover and invests the rest across different assets like stocks and bonds. Flexibility to switch funds, inbuilt benefits, tax savings, insurance cover and lower management charges than mutual funds have contributed to the growing popularity of unit linked insurance plans.

ULIPs are best suited for realizing long-term plans of wealth creation and insurance. Like mutual funds, ULIPs are market-linked plans and may need to be adjusted in a dynamic market to maximize returns. As these plans have a five year lock-in period, it is best to stay invested for a few years to derive considerable returns. At the same time, regular monitoring of funds is important to ensure maximum returns in the long term.

As insurance and investment are covered in a ULIP, investors may not fully comprehend or utilize the investment related choices in a ULIP investment. This may prove costly as the investment risk is borne entirely by the policyholder. Here are some strategies investors can adopt to minimize risks and safeguard their funds.

  • Choose appropriate funds: Aligning funds with long term goals and requirements can reduce risk and maximize returns. The selection of funds is crucial to meet specific needs and risk appetites. Investors can choose equity funds to maximize long-term capital appreciation. Equity funds can offer higher returns in the long term. Alternatively, they can go for conservative funds that are invested in bonds to maximize capital preservation. They may also choose a combination with a hybrid plan. Whatever funds they choose, investors must consult their financial advisor to understand the benefits and risks.
  • Switch funds: A ULIP investment allows investors to switch from one fund to another to meet their changing risk appetite and market view. Based on their risk appetite and understanding of the market, investors can switch between debt and equity funds. Before switching funds, investors must look at fund performance till date, market outlook and their own financial commitments. Done right, timely switching of funds can help maximize returns. Normally, an investor can make 4 free switches in a year.
  • Keep an eye on updates: Investors must follow regular updates from the fund. Based on market movement and outlook, they can adjust their strategy and allocation of funds. An upcoming financial commitment, for example, can impact the risk appetite and lead the investor to choose a balanced fund. Investors must also look out for market opportunities to maximize their returns.
  • Do not surrender: A ULIP investment has a lock-in period of five years and can yield high returns over longer time periods. It is therefore important to persist and not surrender ULIPs for quick gains. Investors must follow the market closely to make changes. A market crash can allow an investor to buy units at a lower NAV. The fund value will increase once the market recovers to offer higher returns.

How to calculate returns from a ULIP

Investors must consider the premium and the term for which the premium is paid to calculate returns from a ULIP investment. To calculate absolute return, also known as point-to-point return, investors need to compare the initial NAV with the current NAV of the scheme. Here are the steps to arrive at the absolute return.

  • Subtract initial NAV from current NAV
  • Divide the value by the initial NAV
  • Multiply the figure obtained in step 2 with 100 to get a percent value

The absolute return indicates the performance of a ULIP in the short term. As investments are built on compounded returns, the absolute return may not give a true picture of actual returns in the long term. Compounded annual growth rate (CAGR) indicates the annual growth of an investment over a period of time.

A policyholder can use the beginning value and end value of the scheme and the number of years to calculate the CAGR for a ULIP. However, CAGR does not consider volatility in returns over a time period. Thus, in the absence of market volatility and other factors, CAGR cannot be used to assume that the ULIP investment would follow a similar growth pattern in the coming years.

Conclusion

ULIP investment can help realize long-term financial goals such as buying a property. Regular monitoring of funds is vital to make adjustments and derive maximum return in the long term. Investors must also look out for opportunities in the market to switch funds and monitor the plan effectively.

Considering the immense benefits of a ULIP investment, you can choose the Invest 4G Plan from Canara HSBC Oriental Bank of Commerce Life Insurance. This plan offers multiple choices of investment along with a life insurance cover. You can choose between 7 different funds and switch funds to benefit from market movements.

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Annual Income (In Lacs)

FAQs

In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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