There are very few investment instruments that provide benefits like how a ULIP does. It is one of the recommended types of life insurance policies, as it has the benefit of investment and insurance. The premium that you pay towards a ULIP policy gets divided into two: one half is paid for the life cover that is provided in the policy. The second half is used for fund investment. When you invest in a ULIP, the units that you purchase from a fund are bought at something known as net asset value (NAV). What is NAV? And what is its significance in ULIP? Read on to know more.
Table of Contents
How Does a ULIP Function?
When you purchase a ULIP policy, half of the policy premium is used for the life insurance cover that is provided to the nominee. The other half is used for investment purposes. In a ULIP, you can invest in equity and debt funds. Equity funds are stocks of market-listed companies. They carry a high-risk factor and give good returns. Debt funds are investments made in government securities and corporate bonds. They carry a low risk factor and offer low to medium returns.
What is NAV in ULIP?
Net asset value is the value per unit of the assets in a ULIP plan. Like you, there are numerous other investors who invest in ULIP. Your insurer collects the amount paid towards the investment and uses it to invest in different market instruments. Based on the premium that you pay, you will be allotted units accordingly. The value of these units is what is know as NAV. Your number of units signifies how much your share is in the amount invested. This helps in proper disbursal of the profits among other shareholders.
How Exactly is NAV Calculated?
On a daily basis, the value of all the units gets calculated and the expenses get subtracted from them. The value that is derived from this is then divided by the total number of units. The end result is the NAV that you get for your ULIP. As an investor, this can be helpful in keeping a track of how your funds are performing in the market. You can also get an idea about how the actual value of your fund increases if you can determine the increase in percentage of the NAV.
The Formula to Calculate the NAV is as Follows:
NAV= (Market value of the investment held by fund+ Value of the current assets)- (Value of current liabilities and provisions, if any)/Number of units existing on valuation date
The value of current liabilities and provisions essentially means the cost that is incurred in managing and maintaining the fund.
For example, two people, A & B, decide to invest in a ULIP of a company. A manages to invest Rs.40,000; meanwhile B manages to invest Rs.30,000. From these payments, the company deducts the charges associated with a ULIP, which leaves the final investment amount at Rs.39,500 and Rs.29,600.
The total amount comes to Rs.69,100, which the insurer will use to invest in different market funds. If the face value of the units created by the fund manager are at Rs.10 per unit, A will own 3950 units, whereas B will hold 2960 units, bringing the total number of units to 6910.
The NAV of the funds on the 1st day will be Rs.69,100, which is then divided by the total number of units, which is at 6910. So, we get 10 as the remainder.
Assume that there is a profit after the investment, increasing the net value of the fund to Rs.80,000. There will be a ULIP NAV. This NAV is calculated by dividing Rs.80,000 by 6910, which is the total number of units. This calculation brings the new value of each unit to Rs.11.57. So, A and B make a profit of Rs.1.57 per unit, giving them more ULIP benefits.
This way, the NAV of your ULIP can help you determine what your returns and the ULIP performance could be, based on your initial investment. However, it might not be helpful in giving a clear idea about the performance of your ULIP in terms of how much your ULIP benefits could be, especially if you have invested in a long-term ULIP.