Everything you need to know about ULIP NAV

Usually, when an individual starts earning, he or she tries to acquire as much wealth as possible in a short period. In the beginning, they might start looking for the different options available to them. The advice they receive is that of keeping the money in a savings account. Eventually, low and sluggish returns usually make them reconsider their investment, pointing them towards sources that provide higher and faster returns. As time passes, they realize that they must take up responsibilities and look after the people in their lives, as their existence starts becoming more important to their loved ones. This is the time they might start looking for insurance policies, a time when concepts such as ULIPs, fund performance, and NAVs would catch their interest.

What is a ULIP policy?

Unit Linked Insurance Plans or ULIPs are a type of hybrid insurance policy. They combine insurance and mutual fund investments to maximize the profits for the policyholder. ULIPs use the premium paid by the policyholder to invest in mutual funds schemes. The respective returns are then added to the policyholder’s bank account or to the maturity amount. In case the policyholder doesn’t make it until policy maturity, the value of the fund or the sum assured (whichever is greater) is paid to the nominees. With the help of ULIPs, a policyholder can control their plan returns by switching their money among different asset types. For example, if the market is down, they can switch to debt funds and protect their funds. Upon recovery, they can shift to equities and enjoy higher returns. While ULIPs seem to offer such favourable benefits, a policyholder should ensure that they check the NAV of a ULIP before investing.

What is NAV?

Net Asset Value or ULIP NAV is the per unit value of the assets sans the value of the liabilities of an investment fund. NAV helps you track your fund’s performance. In a ULIP, several investors pay the premiums to the insurance provider. The insurer then uses the money collected from the investors to create one large investment amount, which can be then invested in a variety of market instruments. Now, each investor gets a specific number of units on the basis of the premium paid. The value of each unit is called the NAV or Net Asset Value. The total number of units held by each investor represents their share in the single invested amount. The profits are then split according to the number of units. Thus, investors looking to understand the daily value of their ULIP fund performance could find knowing the NAV helpful.

How is the NAV of a ULIP calculated?

NAVs are calculated on each business day on the basis of the following formula:

{(Market value of the investment held by the fund + Value of current assets) – (Value of any current liabilities and provisions)} / Number of units existing on the valuation date

The provisions and liabilities include the costs related to fund management.

Consider the following example:

A policyholder pays a premium of ₹ 1,20,000 and purchases a ULIP.

Another investor contributes ₹ 60,000.

After the deduction of basic costs, such as mortality charges, assume that the investment amount for both investors becomes ₹ 1,19,000 and ₹ 59,200.

Therefore, the total amount the insurance company can invest in market funds is ₹ (1,19,000 + 59,200) = ₹ 1,78,200. This is the net market value of the invested fund.

Now, the insurer creates units with a face value of ₹ 20 each.

Therefore, the total number of units = 1,78,200/20 = 8,910 units

Based on this face value, the first investor will hold 1,19,000/20 = 5,950 units. This is because their contribution was ₹ 1,19,000.

If the investment brings up profits, the net investment value will increase. Assume that the fund’s net value rises to ₹ 2,20,000. Consequently, the NAV will also change. However, the number of units will remain the same until you purchase new units by paying the next premium instalment.

The new NAV can be found out by dividing the new net fund value (i.e., Rs, 2,20,000) by the number of units existing in the fund (8,910 in this case).

Therefore, the new value of each unit in the fund is now ₹ 2,20,000/8,910 = ₹ 24.69

So, the net worth of all units of the first investor will be 5,950 X ₹ 24.69 = ₹ 146913.58. Therefore, the profit made by the first investor is ₹ 26,913.

Thus, NAV helps you determine the value of the funds into which you have invested your money. ULIPs benefits make them excellent products for minimising investment risks and generating substantial profits in the long run. Remember to check the NAV of the funds before you make any investments accordingly.

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