What is ULIP?
Unit-linked insurance plans (or ULIP) is a type of life insurance policy available in the market today as they provide their policyholders with dual benefits. These include providing them with an insurance plan in addition to serving as an investment product. ULIPs facilitate wealth creation by allowing the policyholder to invest in their choice of funds. Policyholders can choose from equity funds, debt funds, or both these options. These investments are focused on accruing returns over a period of time along with fulfilling long-term plans of insurance.
Why is Tracking ULIP Fund Performance Important?
Tracking ULIP fund performance can help you check if your investments can meet your financial goals. You can reduce risks, increase returns, and make better decisions with regular monitoring. Here are just a few reasons why tracking is important:
Make Smarter Financial Decisions
When examining ULIP performance, you will learn how to analyse previous fund performance and understand the risk nature of your fund. This allows you to make an informed investment decision based on your financial goals and risk threshold.
Adjust Your Strategy When Needed
By routinely monitoring your ULIP investment performance, you can change your investment strategy. You can use the facilities of switching or premium redirections in ULIPs, depending on policy terms and conditions, to change the fund allocation with changing market dynamics.
Ensure Full Clarity and Transparency
ULIPs give you full clarity on how your premium is being utilised for insurance coverage and investments. You can check the charges being deducted and the growth that you have earned over time.
Key Parameters to Track ULIP Performance
There are different parameters that you can use to track the performance of a ULIP. Some of these parameters are as follows -
Net Asset Value (NAV)
Net Asset Value (NAV) is the market value per unit of the ULIP fund1. It is displayed by the insurer on its website. You can check how the NAV is growing historically and choose funds that have seen consistent growth.
Fund Value
The fund value shows the overall value of the invested premium, and it fluctuates based on the performance of the underlying investments. You can check the fund value to understand how your investment has grown.
Fund Returns (Absolute & Annualised)
Absolute returns measure the total return earned on the investment over the whole tenure. Annualised returns describe the average annual growth rate of the fund. These returns indicate how much your premium has grown over time.
Benchmark Comparison
Assessing the performance of a ULIP fund against a relevant index or benchmark is known as benchmarking comparison. In this relative measure, investors can see if the fund has outperformed or underperformed the market or its group within the same category.
Portfolio Allocation
ULIPs offer various fund options available in terms of debt, hybrid, and equity funds. To enhance returns and reduce risk, you can review and rebalance the portfolio allocation as per the market conditions and personal financial goals or risk-taking appetite.
Fund Rating & Past Performance*
Fund ratings evaluate a fund's performance and quality according to past returns, risk characteristics, and performance of the fund managers. Funds that have been rated consistently high may have a better chance of achieving the investment goals.
Step-by-Step Guide to Tracking Your ULIP
You might have a question in your mind:” How to check ULIP performance?” Well, you can track the performance of your ULIP easily and quickly in two ways. You can use either or both to assess your ULIP fund's performance.
Tracking Your ULIP Manually
Manual tracking of ULIP performance is done using the following steps to measure your absolute returns:
Step 1: Record the Start (initial) NAV and Current NAV
You will have to write down the NAV at the time of investment (initial NAV) and then look for the current NAV on the insurance website.
Step 2: Current NAV - Initial NAV
Once you have both values, you can take the current NAV and subtract it from your initial NAV according to the formula below:
Absolute returns = Current NAV - Initial NAV-
The result will show you your absolute returns from your investment.
Step 3: Convert to Percentage
If you want to know returns in percentage, just divide it with initial NAV and multiply the result by 100:
Absolute Return (%) = ((Current NAV−Initial NAV)/ Initial NAV) ×100
You now have a metric of your ULIP's short-term performance. This helps you to decide whether to continue your investment or find other options that produce a better rate of return.
Tracking Your ULIP Automatically
You can also track your ULIP online more conveniently and easily. Here are the steps that you can take for the same -
Step 1 – Go to the Insurance Company's Website
Go to the insurance company's website. Most companies feature designated pages for fund performance and investment tracking.
Step 2 – Go to the ULIP Performance Page
Look for links such as "Fund Performance", "My Account", or "Investment Tracker". These pages will give you comprehensive and integrated details concerning your ULIP.
Step 3 – Fill In Your Policy and Investment Information
Fill in the necessary information about your ULIP
Step 4 – Look At Current Data
After you enter the details, you will receive the current NAV, fund value, and returns. Some portals even reflect historical data and trends.
Step 5 – Compare Against Benchmarks and Fund Options
You can also compare the performance of the ULIP against market indices or other fund schemes. This will give you some idea of how your investment is performing.
Step 6 – Try More Advanced Calculators
Online ULIP calculators will allow you to forecast returns by changing variables, including premium value or investment duration. You can calculate ULIP fund value at assumed rates of returns to make future investments.
Step 7 – Review and Make Decisions
Now that you have the information, you can make a better decision to either remain in your current fund, switch funds, or modify your investment strategy to reach your financial objectives.
Automated tracking makes tracking your investments easier, faster, and more accurate.
How to Minimize Risks and Safeguard Your Money with ULIPs
Money invested in a ULIP must be safeguarded against potential risks that are part and parcel of investing in the stock markets. The ways in which this can be done are as follows:
Select Funds Based on Individual Financial Goals
Policyholders are encouraged to select funds that most align with their long-term goals in a bid to reduce market risks and maximize their returns. Equity funds, for instance, may be chosen by those looking to maximize long-term capital growth. Conversely, conservative funds may appeal to those looking to maximize capital preservation as they are funnelled towards bonds. Financial advisors can best highlight what would serve them best.
Money May Be Switched from One Fund to Another
These transfers are based on individual risk tolerance and interpretation of the market. These factors govern whether a policyholder chooses to invest in debt and/or equity funds. Prior to transferring money, policyholders are encouraged to consider the fund’s performance thus far, their financial goals, and the market outlook. Fund switch is also subject to product terms and conditions. Also the number of free fund switches in a policy year may be limited as per product conditions.
How to Calculate Returns from Your ULIP
In order to arrive at an understanding of what the returns from a given ULIP might be, investors must look at their premium and the time frame or term during which this is meant to be paid. Absolute Return or point-to-point return may be understood by comparisons drawn between the initial NAV and the current NAV provided by the scheme.
Formula for Absolute Return
Absolute return can therefore be achieved by subtracting the initial NAV from the current NAV.
This is followed by dividing the arrived-at value by the initial NAV. This number must then be multiplied by 100 to arrive at a percentage figure.
Absolute Return (%) = ((Current NAV−Initial NAV)/ Initial NAV) ×100
Importance of Absolute Return
The relevance of the absolute return lies in the fact that it indicates the short-term capabilities of a ULIP. It is important to note that this absolute return is only indicative of a small element of the ULIP, which is made up of compounded returns.
Compounded Annual Growth Rate (CAGR)
Compounded annual growth rate (or CAGR) is the tool used to check the annual growth of an investment over a significant chunk of time. This tool, however, does not take into account market volatility along with other factors. CAGR accounts for compounding and is a better measure for long-term performance.
Common Mistakes While Tracking ULIP Performance
Keeping track of the returns on your ULIP is important, but investors often make avoidable mistakes that can lead to miscalculating results or worrying unnecessarily. Here are some of the errors to avoid:
Judging performance only on short-term NAV fluctuations
More often, investors look only at recent Net Asset Value (NAV) fluctuations and make investment decisions. This is a mistake. Short-term fluctuations are common and they should not automatically be mistaken for poor performance. Have a long-term perspective when choosing ULIPs.
Ignoring charges (mortality, administration, fund management)
There are many charges (mortality, administration, fund management) that are deducted from the fund value, thus, affecting your ULIP returns. Ignoring the charges in computing returns will give you inflated returns which are not correct. Consider the charges in order to get the real picture.
Not reviewing portfolio allocation regularly
ULIPs have multiple investment options classified as equity, debt, or balanced funds. If you do not revisit and rebalance your overall portfolio allocation according to the market scenarios or your financial goals, you may compromise on returns or get high risk exposure.
Comparing ULIP returns with direct equity investments unfairly
Direct comparisons between ULIPs and direct equity investments are misleading because both are different. ULIPs offer life insurance protection and market-linked returns for which some charges are associated with it. Plus, there are ULIP tax benefits too. Direct equity offers only market-linked returns without any life insurance protection and limited tax benefits. So, comparing them is a mistake.
Key Takeaways
- Keeping a close eye on your ULIP plan’s performance is essential for ensuring that you are on track with creating a corpus for your goals.
- When calculating your returns for ULIPs, it should be noted that ULIP charges have an effect on returns and should not be ignored.
- Market movement is inevitable! Judging success only by short-term NAV fluctuations can lead to poor investment choices and unnecessary stress.
- ULIPs have an insurance element with additional cost; it is not correct to compare their return directly with equities.
Conclusion
Monitoring your ULIP's performance is crucial for achieving your financial aspirations and making informed investment decisions. By regularly reviewing your ULIP's key indicators, such as NAV, fund value, returns, and distribution of investment in the relevant portfolio, you can manage potential risks better, develop higher returns, and become aware of charges and common errors.
FAQs
How can you track the performance of a ULIP over the long term?
You can track ULIP performance over the long term by continuously watching the various performance indicators, including Net Asset Value (NAV), fund value, absolute return, annualised return, and portfolio allocation.
Which key factors affect ULIP performance?
ULIP performance is affected by market volatility, the equity vs. debt fund allocation, length of the investment, ULIP charges, and the performance of the fund manager. External factors, such as the economy, interest rate risk, and investor sentiment will also influence returns.
What types of fund options do ULIPs offer to investors?
ULIPs typically offer a range of fund options to accommodate an investor's investment horizon and risk tolerance. These include equity-oriented funds, debt-oriented funds, and hybrid funds that combine both equity and debt.
How can you maximise returns from ULIP investments?
To maximise returns from ULIP investments, you should choose fund options that match your risk profile and goals. Routinely review your portfolio and rebalance, and stay invested for the long term.
How effective are ULIPs compared to traditional life insurance in achieving long-term financial goals?
Both traditional life insurance plans and ULIPs are good for long-term financial goals. However, ULIPs offer market-linked returns while traditional plans offer a stable corpus. So, you can choose between the two depending on your risk appetite and investment strategy.
Sources:
- https://www.lifeinscouncil.org/faqs/ULIPS
