Investors can calculate any mutual fund or ULIP NAV when trading at the stock market closes for a particular day. Investors cannot calculate the NAV of a mutual fund or ULIP during stock market hours. This is because the prices of numerous underlying securities keep changing during stock market hours.
What is Nav in ULIP and How is it Calculated?
ULIP stands for United Linked Insurance Plan. This financial instrument is a mix of life insurance and mutual fund investment. As a result, ULIP gives investors the double benefits of life coverage and wealth creation.
When an investor pays premiums for a ULIP, the insurer takes a portion of their money and uses it for life coverage, while the rest is invested in equity or debt funds. Once their investment period is over, this investor will receive returns based on their ULIP NAV.
The following sections will cover the meaning of NAV of a ULIP and its calculation.
What Is NAV in ULIP?
NAV of a ULIP refers to its Net Asset Value, which is the total value of all of a fund’s holdings minus liabilities and expenses. The per-unit NAV of a ULIP is used by investors to track the performance of the funds covered by it.
To understand NAV, one also needs to understand how ULIP works. Policyholders pay premiums for their ULIP to an insurance provider. This insurance provider again takes the accumulated funds and invests them in market-linked investments.
Every investor will be entitled to a specific number of units in this fund. The market value of each of these units in a fund is referred to as the NAV of a ULIP.
How to Calculate NAV of ULIP?
Fund houses publish the NAV of their funds every day. To calculate this, all expenses are deducted from the value of a fund’s total assets and then divided by the total number of units. The result of this is a ULIP NAV. The formula to calculate the NAV of any ULIP is as follows:
NAV = (Value of Current Assets + Market Value of Investments Held) - (Value of Current Liabilities & Provisions) / Total number of outstanding units on a date.
To estimate the NAV of any ULIP investment, follow these steps:
Step 1: Select a valuation date based on your requirements.
Step 2: Use the formula:
Total Value of Fund Securities at the end of valuation date = (Cash on Hand on valuation date) + (Short-term and Long-term assets held by the fund) to calculate your fund securities.
Step 3: Now, subtract the outstanding liabilities and expenses of the fund.
Step 4: Use the earlier formula to calculate your ULIP fund NAV.
Example Showing the Calculation of NAV in ULIP
Let’s assume, there is an insurance company ABC that offers ULIP schemes to investors. Investor X and Investor Y have purchased a ULIP plan from this insurance provider. Here Investor X has paid ₹40,000, and Investor Y has paid ₹30,000 into the ULIP plan.
This ABC company will deduct its share from an investor's investments as a charge for managing their funds on their behalf. Now, let us say that the hypothetical amount after deduction is ₹39,600 for Investor X’s investment and ₹29,500 for Investor Y’s investment.
Hence, the total sum that this fund house can invest will be ₹69,100. People also call this amount Net Investment Value.
Furthermore, let us assume that the price of each unit of these funds is ₹10. So now Investor X will hold 3960 units, that is ₹39,600/₹10, and Investor Y will hold 2950, which is ₹29,500/₹10. Also, the total number of fund units present in this ULIP is 6910 (₹69,100/₹10).
On the next day after investment, the NAV of this ULIP fund will be the total amount invested divided by the total number of fund units, that is, ₹69,100/₹6,910. Hence, on the first day of investment, the NAV of this fund will be ₹10.
Total Amount Invested
However, if the fund makes a profit and its total assets become ₹1 lakh, its new NAV will be ₹1,00,000/6,910, i.e., ₹14.47. So now Investor X's profit will be ₹57,301 (3960 x ₹14.47), and Investor Y's profit will be ₹42,686.5 (2950 x ₹14.47).
Profits After Increase of ₹14.47
Is It Important to Check NAV When Investing in a ULIP?
NAV is the market value of each unit present in the ULIP fund. It helps investors track the performance of the ULIP fund in the market. For instance, if the NAV of any ULIP plan is high, then it means the fund is performing well and growing in terms of returns.
Investors can use the NAV percentage to calculate the profits their investment had made over a set period. If they want to invest in a particular ULIP, they can check this historical data to get an idea of how well this fund has performed.
Therefore, it is essential to check the NAV of a ULIP fund before buying one because it will give you an insight into your potential returns.
Does the NAV affect a ULIP Returns?
NAV gives an idea about a fund's performance which investors can consider while trying to sell or buy a fund from the market. If a fund's NAV is high, then its returns have been high, and if the percentage of NAV is low, its returns have been low.
Let us say that the NAV of a ULIP is 10% on the day of investment. During the time of maturity, the same fund's ULIP increased by 15%, which means the investor made a profit from the investment.
Investors in the stock market determine the market price of any fund units, and NAV shows the composite prices of all securities in a fund along with liquid cash. Therefore, the rise and fall of NAV will show the percentage of returns you get, but it does not determine your future returns.
Investing in ULIP is a great way to save for the future and own life insurance coverage. In addition, there are many tax benefits investors can take advantage of if they pay a portion of their income into paying premiums from ULIP funds.
Now that you know how to calculate the NAV of a ULIP, you will be able to determine the kind of returns you can expect from it.
FAQs about NAV in ULIP
The NAV of an ULIP keeps changing every time due to the continuous fluctuation of stocks and other securities held in the fund. This is why NAV indicates the performance of the fund.
Generally, the fund houses update their NAVs once in a day. As a result, you can see the change in NAV only once in a day. However, it may vary across fund houses.
To calculate the total fund value, you need to multiply NAV with the total number of fund units available in your portfolio. In other words, Fund Value = NAV x total number of units.
Important Guides Related to ULIP Plans
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.