Absolute Returns In ULIP Plans Explained
Protecting your family’s financial future and investing to ensure that your life goals are achievable are two of the key aspects that you will no doubt want to include in your financial plan. In other words, insurance and investments are both essential to securing your future and the future of your loved ones.
Interestingly, there are financial instruments that offer you the benefits of insurance and investment rolled into one lucrative package. Unit Linked Insurance Plans, or ULIP insurance plans, are just what we are talking about. So, are you wondering - What is ULIP? Well, in that case, let us get to what these plans are and delve a little deeper into what ULIP plans returns are all about.
What is a ULIP?
A Unit Linked Insurance Plan (ULIP) is an option that offers the policyholder the dual benefit of investing in either equity funds or debt funds (or both), while also providing life insurance coverage. It is one of the preferred tax-saving investment options for investors in India. A ULIP insurance plan gives you the benefit of market linked capital appreciation combined with a protective life cover. Therefore, in other words, a ULIP offers the advantage of market-linked investments. You can choose which ULIP funds you wish to invest in based on your risk appetite and life goals you want to achieve.
To understand what ULIP plans returns are about, you need to first get to know what absolute returns are. Let us get to know this concept better.
What does absolute return mean?
Absolute returns are the gains or the returns that an investment has provided to the investor over any specified period. It is the difference between the initial value of the investment, and the final value of that investment, over a particular time. The absolute returns from an investment can be expressed as a percentage.
Let us look at an example to understand this better –
Say that you have invested Rs. 10,000 in an instrument today. Five years later, assume that the investment grows to Rs. 16,000. In this case, the investment has grown by Rs. 6,000. So, the absolute returns from the investment is calculated as follows –
Absolute returns = (Rs. 6,000 ÷ Rs. 10,000) x 100 = 60%
Now, in the example given above, if we were to say that the investment grew to Rs. 16,000 in three years instead of five, the absolute returns would still be 60%. Therefore, the period is of little significance when you are calculating the absolute returns. Effectively, what matters is how much your investment has grown.
ULIPs and absolute returns
As is the case with all investment options, ULIP plans returns can also be expressed in absolute terms. Here, you will need to look at the initial NAV of your ULIP investment, at the time of investment, and compare it with the current NAV. This will give you a good idea of how much your investment in the ULIP funds has grown. You can then use this to compute the absolute returns from your ULIP insurance plan.
Once again, to make this clear, let us look at an example of how the ULIP plans returns can be calculated in absolute terms.
Suppose that you had purchased a ULIP plan and had chosen to invest in debt funds. Let us say the initial NAV at the time of investment was Rs. 120. Today, let us say the current NAV of your investment is Rs. 180. That means the NAV of your investment has grown by Rs. 60. Therefore, the absolute returns would be 50% [(Rs. 60 ÷ Rs. 120) x 100].
That is how to calculate the absolute returns from your ULIP plan. You can perform this calculation at regular intervals to get a fair idea of how your investments are faring. These returns are called absolute, since they are not compared to or computed relative to any benchmark.
Benefits of investing in ULIPs
Now that you have a clear idea of the absolute returns in ULIP plans, let us look at how you can benefit from them. There are many advantages to investing in ULIPs. Here is a preview.
• Flexibility of investment
ULIPs provide flexibility of investment by allowing you to move your money between equity and debt funds, depending on the movement of the market.
• Market-linked returns
They give you an opportunity to experience the advantages of market-linked returns, with a long-term investment horizon.
• Financial security through a life cover
ULIP insurance plans also offer a life cover, so your nominees/beneficiaries are secured in case something untoward was to happen.
Given these benefits, you will find that it can be of great advantage to include a ULIP in your portfolio. Once you have purchased your Unit Linked Insurance Plan, ensure that you regularly calculate the absolute returns to keep track of how your investment is performing.
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