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Currently, only a few new generation ULIP schemes have become more customer-centric with a reduced amount of charges. Brijesh Parnami, CEO & Executive Director of Essel Wealth Services said, “This new age ULIPs are better performers than mutual fund schemes when the duration is long. So, several investors are opting for this schemes.”
Rakesh Goyal, Director, Probus Insurance Broker added, “An investor needs to calculate returns and review investments in ULIP schemes on regular basis. Based on the premium you pay and the term, for which the premium is paid, you can calculate your returns from ULIP investments.”
Financial advisors recommend, to get considerable returns from ULIP investments, you need to be invested for a few years like you do for mutual funds or other investment instruments. ULIPs are market-linked plans and have a 5-years lock-in period. So, Goyal recommended, “In case your ULIP schemes don’t give expected returns after computing or underperforms, you can switch to a better fund after the expiration of the lock-in period of 5 years.”
There are certain charges imposed on ULIPs that an investor needs to know while analysing the returns. The charges deducted might vary from insurer to insurer and plans to plans.
Goyal said, “Types of fees and charges which are deducted from ULIP scheme are mortality charges, fund management charges, premium allocation charges, policy administration charge as well as surrender charge which is deducted for partial or complete premature encashment of units.”
Here are two ways to measure your ULIP returns:
1. Absolute returns
If a policyholder wants to calculate an absolute return or so-called “Point-To-Point Returns”, the only values he/she might need are the current NAV of the scheme and the initial NAV.
To calculate Absolute Return, he/she needs to follow the below three simple steps:
Step 1: Subtract the initial NAV from the current NAV
Step 2: Divide the value obtained by the initial NAV
Step 3: At last, multiply the amount with 100 to get a percent value
The formula for calculating Absolute Returns is: [(Current NAV – Initial NAV)/Initial NAV] ×100
Goyal said, “This is one of the most effective ways to analyse the performance of a ULIP which has been held for a short duration of time (for 12 months or less).” For instance, if a person’s NAV at the time of purchase was Rs. 250 and is Rs. 350 after one year, then the absolute return will be 40%.
Drawback
This method can be used at any time during the investment, but is only efficient in the initial phase. Navin Chandani, Chief Business Development Officer, BankBazaar.com cautioned, “This is because it helps policyholder to calculate only the simple returns on initial investment. Since investments are built on the compounding of the returns on the investments, this method doesn’t give a true picture of actual returns on investment when you are invested for long term.”
2. Compounded Annual Growth Rate (CAGR) Parnami said, “Compounded annual growth rate (CAGR) is an indication of the annual growth of an investment over a specific period of time. Generally, a policyholder can use a simple mathematical formula to calculate CAGR for a ULIP scheme. The formula uses the end value of the scheme, the beginning value and the number of years of investment.”
The formula for calculating CAGR is: {[(current value of NAV/initial value of NAV)^(1/number of years)] – 1}*100
For example, if you invested in a scheme via your ULIP with NAV Rs.25 and now, the NAV is Rs.35 after 5 years, the formula shall be: {[(35/25)^(1/5)] – 1} × 100 = 6.96%.
Therefore, compound annual growth rate is equal to 6.96%.
Drawback
CAGR stands for a mean annual growth rate that does not take into account the volatility in returns over a period of time. This is a purely historical metric. Chandani cautioned, “So, even if your investment has been growing consistently over the last five years, you cannot safely use CAGR to assume that the investment will continue to grow at the same rate during the following year or years, as market volatility and other factors may come into play and affect that investment’s rate of growth.”
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