What is a ULIP NAV?

A unique insurance-cum-investment tool, Unit Linked Insurance Plans (ULIPs), can help us meet our financial goals, while also providing insurance cover. These products are goal-oriented investments and their funds are based on your personal risk appetite. The premiums you pay are invested in a variety of funds in order to help you maximise your savings. This investment avenue is quite similar to Mutual Funds with additional benefit of Life Cover, where you can purchase units from a fund at their Net Asset Value (NAV).

To better understand what an NAV is, we first need to take a look at how Unit Funds work. Much like mutual funds, for ULIPs as well, money from a number of investors is pooled together to create one large investment sum. This money is then invested in various markets. To enable the company to properly divide the returns amongst the investors, the fund manager divides the total investment corpus into small units with a particular face value. Based on this face value, the NAV of that particular ULIP can be calculated. The formula used to calculate the NAV is as follows:

NAV = (Value of Current Assets + Market Value of Investments Held) - (Value of Current Liabilities & Provisions) / Total number of outstanding units on date

To better understand the calculation, let's take a look at the following example:

A company, by the name of A Life Insurance is providing ULIPs to two customers, Mr. Y and Mr. Z. Mr. Y decided to pay INR 50,000, while Mr. Z only wants to contribute INR 40,000. After all the plan costs, such as allocation charge, administration charge and mortality charge, are deducted, let's assume Mr. Y's investment amount is INR 40,000, while Mr. Z's investment amount is INR 30,000. This means that the total amount available to invest in various market funds is INR 70,000. This is also known as the net investment value.

Now, let's say the fund manager has created units with a face value of INR 10 per unit. Based on this, Mr. Y will hold 4,000 units, while Mr. Z will hold 3,000 units. The total number of units within the fund will be 7,000.

On the first day, the NAV of the funds will be INR 70,000 (total amount), divided by 7,000 (total number of units), which leaves us with INR 10.

After the investment is made, let's assume there is a profit, which increases the fund's net value to INR 80,000. Now, there will be a ULIP NAV. The new NAV can be calculated by dividing INR 80,000 by 7,000 (as the number of units in the fund remains unchanged). This means the new value of each unit in the find is now INR 11.42, and Mr. Y and Mr. Z have both made a profit of INR 1.42 per unit.