Things to Keep in Mind While Calculating ULIP Returns

For many middle-class Indians, ULIPs (Unit Linked Insurance Plans) are one of the go-to investment options mainly because it offers dual benefits of insurance and investment under a single policy. As IRDAI (Insurance Regulatory and Development Authority) has revised ULIP fee structures, it has become even more attractive for investors. 

Apart from being a hybrid financial product, ULIPs are known to offer the highest returns compared to other life insurance policies in the market. Also, they are highly tax efficient. The premium you pay for the policy is eligible for tax benefits up to ₹1.5 lakhs in a financial year under Section 80C of the IT Act. 

Another significant feature of ULIP is that it allows you to invest in many debt and equity-related funds to suit your specific needs. Also, you can switch your investments in one fund to another from time to time to capitalise on the market movement and increase your returns potential. So, how do you calculate the ULIP returns?

Since ULIP investments are similar to mutual funds, tracking the returns is also identical. However, you must be aware of the various charges associated with ULIPs like mortality charges, fund management charges, premium allocation charges, etc., which can affect overall returns. 

Let us look at three ways to calculate ULIP returns

Absolute Returns

To calculate the absolute returns in ULIP investment, you only need your scheme’s current NAV (net asset value). Once you know the NAV, you can use the following formula: 

Absolute returns = [(Current NAV-Initial NAV)/Initial NAV] × 100

This method is highly effective to analyse the ULIP plan’s performance that you have held for a short period of 12 months or less. 

Example: Let us assume that the NAV of the funds you hold when purchasing the ULIP is ₹ 100 and it grows to ₹150 in one year, the absolute returns will be 50%. 

Simple annualised Returns

The method is helpful to compute the effective annual yield of the scheme. It requires you to know the absolute returns. To calculate the simple annualised returns, you must use the following formula:

Simple annualised returns = [(1 + Absolute Rate of Return) ^ (365/number of days)] – 1

CAGR – Compounded Annual Growth Rate

CAGR stands for mean annual growth rate, and it does not consider the volatility in returns over a period. The formula for calculating the CAGR is as follows: 

CAGR = {[(ending value of NAV/beginning value of NAV) ^ (12/number of months)] – 1 per lakh invested} * 100

Let us understand the calculation with an example. 

Let us assume you have invested ₹2 lakhs in a scheme through ULIP with a NAV of ₹20 and if the NAV has increased to ₹40 after two years, the formula shall be:

{[(40-20) ^ (12/24)] – 2} × 100 = 24.72%

Therefore, the Compound Annual Growth Rate is equal to 24.72%.

If you find manual calculation too overwhelming, you can use the ULIP calculator to compute the returns.