How to Track the Performance of ULIPs? Key Metrics & Tips

2024-08-02

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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 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.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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Canara HSBC Life Insurance offers online ULIP plans that blend life insurance protection with investment growth, helping you build wealth while securing your family's future.