Over the years, Unit Linked Insurance Plans or ULIPs have gained immense popularity due to their hybrid nature. It provides you with the assurance of life cover against uncertainties while allowing you to invest in different assets and accumulate wealth. When you buy ULIP, the insurance companies use a specific part of the premium to provide life protection and invest the rest in various financial instruments to suit your long-term goals and risk appetite.
Many financial advisors recommend investing in ULIP mainly because it offers the highest returns compared to other life insurance policies. When you invest in ULIP, you purchase units of mutual funds at their NAV (Net Asset Value). Let us know more about what NAV is and how it is calculated.
What is NAV in ULIP?
Net Asset Value or NAV is the value of per unit of the assets minus the value of the liabilities of an investment fund. Knowing the NAV allows you to assess the fund’s performance. To understand what NAV is and its significance, you must first know how ULIPs work.
Like you, many other investors also pay the premium to the insurance company to keep their ULIP active. The insurance company collects the money from all investors to create one large investment amount and invest in different money-market instruments. Large and diverse investments increase the chances of generating valuable returns for all.
Every investor gets a specific number of units based on the premium amount, and the value of each unit is called Net Asset Value (NAV). The number of units you hold represents your share in the invested amount. And, the insurance companies split the profit among individual investors based on the number of units they have.
How is NAV calculated?
The Net Asset Value is calculated every day using the following formula:
{(Market value of the investment held by the fund + Value of current assets) – (Value of current liabilities and provisions, if any)} / Number of units existing on the valuation date
The liabilities in ULIP include various costs involved in managing the funds. Let us understand the NAV calculation with an example.
Let us assume you purchase an ULIP and pay a premium of ₹50,000. Another investor purchases the same plan and pays a premium of ₹40,000.
After deducting all the basic costs like mortality charges, the final investment comes to about Rs. 49,500. And, for the other investor, let us assume it is Rs. 39,600.
Thus, the insurance company can invest a total amount of ₹89,100 (49,500 + 39,600). Suppose the fund manager has created units with a face value of ₹10 per unit, you will hold 4950 units, and the other investor will hold 3960 units. The total number of units in the fund will be 8,910.
On the first day, the NAV of the fund will be 89,100 divided by the total number of units. In this case 89,100/8910.
After the investment, let’s assume the insurance company earns a profit, which increases the total fund value to ₹100,000. Now, there will be a new NAV, and you can calculate it by dividing ₹100,000 by 8910. This means the new value of each unit in the fund will be Rs. 11.22, and both you and the other investor will earn a profit of ₹1.22 per unit.
Final Word
Now that you know what NAV is and how it is calculated, you can start investing in ULIP and reap its benefits. There are different ULIPs available in the market; make sure you compare the plans well and choose the one that best suits your needs and budget.
