Unit Link Insurance plans are the hybrid insurance plans which allow the policyholder to invest in various bonds and equity portfolio like one does in a Mutual Fund. The only difference between the Mutual Fund and ULIP-fund is the additional Life Cover provided by it. One can choose from the wide range of investment option offered in a Unit Linked Scheme. Though the returns on investments are not guaranteed by the insurer in these policies as the investor bears the risk of portfolio, investors decide from the various options like high risk high return Equity funds or any other low risk low return option.
The return on the investment totally depends on the capital market condition and the performance of the portfolio opted by the policyholder. The money as premium given by the policyholder is first used for the risk cover costs and to meet other operating and tax charges. The rest of money of ULIP-policy premium is allocated in a Unit Fund for investment purpose. This UNIT FUND is divided into number of units to indicate the share of policy holder in it. One can buy or liquidate these units as any other stock investment in the Unit Linked Insurance Program with some processing charges. The value of these units technically denoted as net asset value varies according to market conditions.
Net Asset Value
Like the Stock Quotes of Companies on various market indices, NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the web page of the respective insurance company. This is similar to the value of each unit of Mutual Fund.
Calculation of NAV
The NAV for the Unit Linked Insurance Fund is calculated just like that for a Mutual Fund. To explain about how the NAV for a fund is calculated, let’s take an example
Let Company X has started a ULIP scheme and invests the surplus money in Equity Markets. Say, an amount of Rs. 1000 is allocated to the unit funds for the purpose of investments from the premium of each policy holder after various cover charges and fees. Let there are five policy holders A, B, C, D & E. So the total money in the Unit Fund would be Rs 5000. The Company will create unit funds of face value Rs 1 each and distribute it to all the investors. So A, B, C, D & E would get 1000 units each.
The insurer will create a portfolio of various shares and bonds for investment and will invest the total money in it. The value of this portfolio will change according to the market conditions. At the end of each trading day, the total net worth of the investment will be calculated. Say, after the trading day Y, the value of total initial investment (of Rs 5000) portfolio is Rs. 7000. So, on that particular day initial investment of RRs5 will give Rs 7 or Rs 1 (which is one unit) will give Rs 7/5 or Rs 1.4 on liquidation. This Rs 1.4 will be the NAV or the current value of one UNIT.
This value will increase or decrease along with the price of various equity or shares in which the money is invested. The updated NAV is constantly posted on the website of the insurer.
One should note that the value NAV will be arrived after the insurer has deducted the profit margins. So, insurer can show the NAV of Rs 1.3 after taking profit margins in which it is getting Rs 1.4. This profit margin varies from place to place but has an upper limit imposed by the regulator.
For further queries and doubts regarding NAV calculations of ULIP scheme, please post questions in comment section.
Recent Comments