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    How To Invest Money With ULIPs

    How To Invest Money

    How To Invest Money With ULIPs


    April 23, 2020

    By : Bajaj Allianz Life

    Over the years, unit linked insurance plans (ULIPs) have evolved as one of the effective and popular protection, investment and tax-saving products for Indian investors. After numerous changes and multiple upgrades, today’s New Age ULIPs are one of the preferred wealth generation tools available in India.

    Whether it’s building your start-up, buying a house, going for a foreign holiday or saving for retirement, ULIPs allow you to customize your investment plan according to your life goals, investment horizon and risk appetite.

    Another unique benefit of ULIP investment is that investors have the choice to select ULIP funds on their own and decide how the portfolio performs. Using techniques such as switching and premium redirection, they can effectively optimize ULIP returns and reach their life goals with ease.

    In this article, you will get some tips on how to invest money in ULIPs to get optimum returns and learn about important details such as:

    • How is the premium invested in multiple funds?

    • How NAV is calculated and fund value is generated?

    • Tax benefits of ULIP investment.

    You can always leave the fund switching work to the ULIP’s fund manager, in case you are not comfortable with it. You can also consult a subject matter expert who can help you with the same.


    Where does my ULIP premium go?


    When you invest in a ULIP plan, the premiums you pay are invested in variety of funds opted by you as available within the respective product after relevant deductions have been made. These ULIP plans also provide you with a Life Cover Let’s understand this with an example.

    Assume that you are paying a monthly ULIP premium of Rs. 100. Out of this Rs. 100, Rs. 5 is deducted as ULIP charges and Rs. 35 is invested for insurance cover. The remaining Rs. 60 (Rs. 100 – (5 + 35) = Rs. 60) is invested on various funds as selected by the investor. When this amount is pooled together from all other investors, it is called a Unit Fund.

    Typically, insurance companies provide investors with the option to choose from funds available with the product or from investment strategies wherein few strategies allow investors to manage his/her own funds or let the insurer manages funds as per the needs of the investor.


    What is NAV and how is it calculated?


    The Net Asset Value or NAV of a fund is the price per unit of a fund. ULIP NAV of a fund is dependent on the performance of the debt and equity markets. ULIP returns or fund value is calculated on the basis of NAV of the ULIP fund. According to IRDAI, it’s mandatory for fund houses to declare the net asset value (NAV) of a fund on a daily basis.

    NAV of a ULIP plan is calculated by deducting total debt of the fund from total assets and dividing it by the number of outstanding units.

    The formula is: Net Asset Value (NAV) = (Assets – Liabilities) / (Number of Outstanding units)

    Let’s illustrate this with an example.

    Assume that the total value of assets for a ABC fund is 50 Crores and is divided into 2 Crore units/ shares so that retail investors can invest in the fund. There are various operational costs of ABC funds such as administration charges, fund allocation charges, management fees, insurance claims etc. These are the liabilities of the fund. Assume this liability or costs amount to Rs. 2 crores per annum. In this case, NAV of the ULIP fund will be calculated as follows.

    NAV of ABC ULIP plan = (Rs. 50 – 2 Crores) / Rs. 2 Crores = Rs. 48 crore/ 2 crores = Rs. 24

    In this case, the NAV of ABC ULIP fund is Rs. 24 as on date of calculation


    How is ULIP fund value calculated?


    Before we explain how fund value is calculated, it’s important to understand that the value of a ULIP fund fluctuates with time depending on prevailing market conditions. It’s important to understand how fund value is calculated when you invest in ULIPs since total fund value is what you receive on the maturity of the ULIP plan.

    Fund value of a ULIP can be easily calculated by multiplying the NAV on the particular day by the number of units in your account. For example, if you hold 1,000 units of a particular fund and the prevailing NAV on that day is Rs. 18, the fund value of your ULIP plan is Rs. 18,000 (1000 x 18). As the NAV fluctuates, so does the fund value.


    Tax benefits of ULIP investment


    Apart from being one of the preferred investment instruments to generate wealth and achieve your life goals, they offer a very effective method to save taxes. Some of these benefits include:

    • Section 80C deductions: Premiums paid are eligible for tax deductions up to Rs. 1.5 lakh per annum under Section 80C of the Income Tax Act 1961, subject to provisions stated therein.

    • Tax exemption on maturity benefit: ULIP tax benefits are offered on maturity too. The maturity amount plus any bonus amount is tax free according to section 10 (10D) of the Income Tax Act 1961. Here too the conditions are similar to those for availing tax deductions u/s 80C. For ULIP plans purchased after April 1, 2012, the annual premium should be less than or equal to 10 per cent of the sum assured for the entire term. For ULIP plans purchased before April 1, 2012, the annual premium should be less than or equal to 20 per cent of the sum assured for the entire term. In case there is a payout due to demise of the policy holder during the policy period, the death benefit is tax free too.

    • Capital gains tax: Union Budget 2018 introduced the Long Term Capital Gains (LTCG) tax under which LTCG of over Rs 1 lakh in equity investments and equity mutual funds will be taxable at 10 per cent, without indexation benefits. ULIP plans allow you to invest in equity funds, but do not attract LTCG tax. New age ULIPs are convenient, transparent, value-packed and reliable investment products to help you achieve your life goals. If you dream of your own start-up in the future or a world tour to fascinating destinations or want to live a comfortable retirement life, new age ULIPs can be customized according to your life goals, investment horizon and risk appetite. Take a step towards your life goals today.

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