Last Updated on March 11, 2020 by Gopal Gidwani
A ULIP policy can be one of the hybrid insurance products. It can club the benefits of investment and insurance under a single integrated plan. It can offer financial protection to your family members as well as help you meet your life goals such as buying a new house, planning your child’s wedding, starting a new business venture, and so on. Moreover, it can let you achieve returns based on your risk appetite, fund choice, and investment goals.
Understanding ULIP concepts
Before investing in a ULIP, understanding the basics of the policy including the terminology and concepts can be imperative. Although a ULIP policy might consist of many concepts such as lock-in period, the sum assured, fund value, and so on, learning what the Net Asset Value (NAV) under a ULIP policy is in detail can be complex. Therefore, let’s first try to interpret the meaning of NAV for better clarity.
What is Net Asset Value (NAV)?
NAV can be termed as the total shares value that you hold as a part of your investment portfolio, which can include all the cash and liabilities, divided by the total number of your outstanding units. Typically, NAV of the mutual fund can be nothing but the ‘book value.’
Before understanding the NAV in detail, you should first understand how a unit fund can be created. Under a ULIP policy, you can find equity funds and debt funds. While equity funds can be risky investment options, a debt fund can consist of minimal market risk. The funds that you select can impact ULIP returns as well as your accumulated corpus.
Many of you might invest in a ULIP policy with the primary aim to achieve relatively high returns. If you want to obtain high returns, you should build an enormous corpus. To generate a substantial corpus, your insurer might combine your minimal fund investments. After your invested capital reaches a targeted limit, you can invest the money into capital markets.
Calculating NAV
Typically, your fund manager might divide your accumulated corpus into small units with a face value to determine your returns on investments. When your fund manager divides the amount, you might obtain the shares of units. The total value of that unit can be termed as Net Asset Value (NAV). Typically, the total value of funds can vary, which can lead to the fluctuations in NAV after investing.
Calculating the ULIP NAV can be easy with the help of the following formula:
NAV = (Market value of investments held by the fund + value of any current assets) – (value of current liabilities & provisions) / Number of units existing at valuation date (before creation/ redemption of units)
To conclude, after understanding ULIP NAV, you should look for the right ULIP policy based on your financial goals. A ULIP policy can be a long-term investment, which can let you create wealth as well as safeguard the future of your loved ones. Moreover, it is a flexible plan that can let you choose the premium payment mode, type of fund, switching feature based on your convenience.
Tax benefits on ULIP
Apart from financial security, the major advantage offered by a ULIP policy can be the provision of tax benefits. As a policyholder, you can claim tax deductions on premiums as well as maturity proceeds according to Section 80C and Section 10(10D) of the Income Tax Act, 1961. Moreover, you can enhance your fund value by adding top-up premiums periodically.