United Linked Insurance Plans, commonly known as ULIPs, are a popular investment today. Many consider a ULIP policy a prudent investment choice as it offers the benefits of both a life insurance plan and a market-linked investment plan.
In a ULIP insurance policy, a part of your premiums goes for securing a life cover, whereas the remaining part is invested in market-linked securities. ULIP returns, generated over the policy tenure, depending on several factors.
However, due to good returns, like the Tata AIA policy for wealth creation, ULIPs are securing a strong place in one’s financial plan.
Key Factors that Affect ULIP returns
A ULIP plan returns majorly depend on the type of investment assets you must have opted for. Factors like ULIP charges and overall market performance also impact the returns. You can select the asset class (equity, debt or balanced) per your preference. Due to the difference in their nature, risks involved, and benefits offered, all funds offer different returns. The higher the risk, the higher returns generated and vice versa.
One of the two methods is followed to calculate ULIP returns; absolute returns and compounded annual growth rate (CAGR).
What is Meant by Absolute Returns?
As an investor, you should keep a period check on the return on your investment or want to know how much a particular investment potentially gives. Thanks to the online ULIP calculator, estimating returns has become easier. However, knowing how to calculate returns can always come in handy.
Absolute returns, also known as total returns, is the actual return earned by an investment over a period of time. It is the simplest form of calculating return from an investment as it does not consider any relative benchmark or performance measure.
Absolute Returns in ULIP Insurance
The ULIP calculation of absolute returns means the total returns you get from the ULIP plan without comparing it to any benchmark. In simple words, it measures how much your initial ULIP investment has grown to decline without considering the period. For a longer-performing fund, absolute return tends to show a high positive return as it doesn’t adjust the inflation aspect.
Calculating Absolute Returns in ULIP
Absolute returns in ULIPs are computed based on the NAV, that is, net asset value. The NAV is calculated daily, and the value is derived after subtracting all the expenses. Insurance companies levy certain ULIP charges, which are considered during return calculations. Absolute returns are expressed in percentage terms on the NAV. The investment period in the fund becomes irrelevant while calculating these returns. The formula for calculating absolute ULIP returns is,
Absolute Returns = [(Current NAV – Initial NAV)/Initial NAV] X 100
So, if the current NAV of your fund is ₹ 280 and the initial NAV was ₹ 200, then the absolute return on your investment is 40%. Thus, the absolute return measures the way your ULIP insurance has performed. This method can help determine the profit or loss on the capital you have invested. This return is generally used for computing returns for less than one year.
Advantages and Disadvantages of Absolute Returns
Let us look at some of the advantages and disadvantages of absolute returns.
- It is easy to calculate and understand for all the users
- It provides returns in actual terms
- It shows the total loss or gains from an investment
- It fails to show the return on an investment over a period of time
- It does not compare against any benchmark
- It does not adjust returns for inflation; thus, an investment may show a positive return even for a non-performing or negatively performing investment.
ULIP as an Important Investment Alternative
ULIPs are becoming increasingly popular these days. They offer several benefits to investors, along with life cover. They also provide tax benefits and are recommended for a longer time horizon. If you select an equity fund, it can offer a higher ULIP return. ULIP plan is one of the best options because it offers a lot of flexibility while limiting risks.
Investing in a good ULIP plan can enhance your savings and investments. With the dual benefits of insurance and market-linked investment, economical premiums, and good returns added features, ULIPs are one investment tool to safeguard you and your family’s future.