At different life stages, people have different life goals. When a person gets married, their focus would be the financial well-being for their partner. When their child is born, the goal would be securing the future of their child. As you approach different life stages, your goals also change. In order to fulfil these goals, you need to have a sufficient amount of wealth.
Instead of relying on savings, you can grow your wealth instead with the help of investments. One financial instrument that can help you in growing your wealth is a ULIP plan. ULIPs offer guaranteed returns to its investors. If you are planning on investing in it, read on to know how you can calculate your returns after investment.
What is a ULIP?
A ULIP is a type of life insurance policy in which you get to enjoy the benefits of investment and insurance under a single policy. You get to invest in equity funds, debt funds or balanced funds. As equity and debts funds have different risk factors and returns, the investment should be done based on your risk appetite and objectives.
Life protection cover is provided to the dependents of the policyholder. If the policyholder suddenly passes away during the term of the policy, their dependents would be compensated with a death benefit. This monetary compensation will help them stay financial stable.
What are returns in ULIPs?
When you invest your money in ULIPs, it is usually pooled together along with the money of other investors. This is carried out by the insurer who invests it in funds as per the investor’s liking. Once the investment is done, each investor gets a specific number of units based on their investment. The returns that you gain from this investment gets added to the initial investment amount. Once your plan matures, these returns are compounded and given to you as maturity benefits.
How do you calculate the returns in ULIPs?
If you are wondering how to calculate for your plan, here are two methods that you can use:
- Absolute returns
The percentage that you get when you calculate your returns using initial and current ULIP NAV is known as absolute returns. This type of return is also known as point-to-point return. In order to calculate absolute returns, you need to follow the steps:
- Know what your initial and current net asset value (NAV) is
- Subtract the initial NAV from your current NAV
- Divide the value that you get from this subtraction by the initial NAV
- Multiply the sum of this division by 100
The formula to calculate absolute returns is: [(Initial NAV-Current NAV)/Initial NAV]x100
While this method is helpful when you want to calculate your returns after the initial investment, it is not helpful after a point. As the returns get compounded with your investment, it might not give you the correct value of your returns.
- Compounded Annual Growth Rate (CAGR)
Compounded Annual Growth Rate or CAGR is another way of calculating the returns of ULIPs. Using this method, the policyholder can calculate the overall annual returns of their plan. The formula for calculating the CAGR is:
[{(current value of NAV/initial value of NAV)^(1/number of years)] – 1}x100
Consider this example:
You invested with the ULIP NAV at the time being Rs.30, and care looking at the current NAV of Rs.40 after 5 years. The formula would be [{(40/30)^(1/5)]-1}x100= 5.92%
As you can see, the CAGR would be 5.92%.
While this formula is great to calculate the annual return for a specific time period, it does not take into account the actual change in returns. As market fluctuations impact your investment and in turn the returns, the formula might not be able to give you an accurate value on your returns.
Based on the information above, you can use either of the formulas to get an idea about what your returns are. However, do keep in mind that these formulas have their drawbacks and completely relying on them will not give you an accurate value. Before you invest in ULIPs, use the ULIP calculator to get a rough idea about the returns on your investment.
