ULIP Returns: Working of ULIP Plan Returns

The Workings of A ULIP Plan

In a ULIP plan, you choose the policy tenure, premium paying tenure, premium paying frequency and the amount of premium that you want to invest. The premium you pay is divided into two parts- a part of it is used to provide life cover and the remaining is invested in market-linked funds of your choice.

You also choose the market linked fund for investment. Primarily, ULIPs offer three types of market linked funds –

• Equity funds that invest primarily in equity-oriented securities and have a high risk, high return profile.
• Debt funds that invest primarily in debt instruments and have a low-risk, low-return profile.
• funds that invest in a combination of both equity and debt instruments. Such funds have a moderate risk and moderate return profile.

After that, the premium that you pay, net of applicable charges and taxes, is invested in the chosen funds. The funds, in turn, invest in a diversified mix of securities that are available in the financial markets. Then, as the value of the underlying securities changes depending on the market performance, the value of the portfolio changes.

• ULIP Returns

  As explained earlier, the return of ULIP can be volatile as it invests in market linked securities. Hence, ULIP returns depend on the portfolio where the fund has been invested. With the market movement, the value of the portfolio also changes. Therefore, ULIP returns are not guaranteed.
  For instance, say you invest in an equity fund which invests in five equity stocks. The values of each stock are as follows –

  
  

• If one unit of each stock is taken, the overall value of the portfolio is Rs.10 + Rs.12 + Rs.14 + Rs.16 + Rs.20 = Rs.72
  Two days later, the prices change and are as follows –

• Now the overall value of the portfolio is Rs. 12 + Rs. 13 + Rs. 15 + Rs. 15 + Rs. 19 = Rs.74
  While some stocks suffered a fall in prices, others grew and the overall value of the portfolio grew by Rs. 2 giving you a market-linked return on your investment.
   

How to Calculate ULIP Returns?

There are two ways in which you can calculate your ULIP returns. They are explained below –

• Absolute returns

  Absolute returns mean the total returns that you earn from the ULIP over a specified investment tenure. It is also called a ‘Point-to-Point’ return since it measures the returns from one time to another.

  Absolute returns can be calculated simply by knowing the initial NAV (Net Asset Value) of the fund and the current value. The formula is as follows –

  Absolute returns = [(Present NAV – NAV at the time of initial investment) / NAV at the time of initial investment] * 100

  For instance, say the initial NAV of the fund when you invested was Rs. 10 and the current NAV is Rs.12, the absolute return would be calculated as follows –

  Absolute return = [(Rs. 12 – Rs. 10) / Rs.10] * 100 = (Rs. 2 / Rs. 10) * 100 = 20%

  
  

• Compounded Annual Growth Rate (CAGR)

  The Compounded Annual Growth Rate or CAGR measures the average annual return of the ULIP. It is calculated using the following formula –

  CAGR = {[(current NAV/initial NAV) ^ (1/number of years)] – 1} *100

  For instance, say the initial NAV is Rs. 10 and the current NAV is Rs. 12 and you stayed invested for 5 years, the CAGR would be calculated as follows –

  CAGR = {[(Rs.12/Rs.10) ^ (1/5)] – 1} *100 = 3.71%

  
  

Are Returns from ULIPs Guaranteed?

ULIP returns aren’t guaranteed, as they depend on several factors like:

Market Performance

ULIP returns move with the market. If you’ve invested in equity funds, they typically carry higher risk but also offer the potential for greater returns. In contrast, debt funds tend to be more stable and generally yield more modest growth. The performance of the market affects the performance of these funds. Your fund choice decides your returns.

Investment Charges

Your premium in a ULIP isn’t fully invested since there are some charges involved. These may include fund management fees, policy admin costs, and mortality charges. While they reduce your invested amount slightly, they’re important for managing your life cover and the policy’s features. Understanding these charges helps you plan better.

Lock-in Period

ULIP plans have a five-year lock-in period, but if you keep the policy active after that, your money can grow and compound, which is particularly helpful if you're saving for long-term objectives.

Calculation Using the ULIP Calculator

A ULIP calculator provides you with an estimate of how much you should invest to achieve your financial objectives. Depending on your premium, policy duration, risk appetite, and type of funds, it estimates the possible returns from the investment part of your ULIP. This provides you with a clear picture of what your corpus can yield.

Key Takeaways

• ULIP returns are market-linked. Your fund performance will vary based on the market and the fund type you select.
• ULIPs are best suited for long term as the market growth can help offset the initial charges incurred.
• Long-term holding improves your chances of optimal ULIP returns through compounding.
• A ULIP calculator gives a clear estimate of the expected maturity value based on your premium, fund type, and tenure.
   

Conclusion

Though ULIP returns are not guaranteed, it has the potential to outgrow your wealth in the long-term, subject to market highs and lows.

ULIPs also allow tax deductions and exemptions under Income Tax Act, 1961, subject to provisions stated therein.