What are Absolute Returns in ULIPs?

The financial world offers many investment options to investors for earning returns. Unit Linked insurance plans (ULIP) are one such financial instrument. They are an excellent option for long-term investment as they combine insurance coverage and investment options. To understand ULIPs better, let’s dive deep into ULIPs and the returns and benefits they offer.

What is ULIP?

The first thing to focus on is what is ULIP. ULIP stands for Unit Linked Insurance Plan. ULIP investment is a combination of investments and life cover protection. The premium you pay towards ULIP is divided into two parts. One part is for the life cover, and the other is invested in a fund you choose. You can invest in funds such as equity, debt or a combination of both, based on your financial goals.

What are Absolute Returns in ULIP?

Absolute returns refer to the total returns of the investment in a given time frame. Absolute returns are measured in terms of percentage, which shows the appreciation or depreciation of the value of an investment.

How to Calculate Absolute Returns in ULIP?

To calculate absolute returns in ULIP investment, you require two things:

  1. NAV (net asset value) of the investment
  2. The initial NAV of the ULIP scheme

For example, you invest in a ULIP scheme with an initial NAV of ₹15 per unit. After two years, the current NAV increases to ₹20 per unit. The calculation for absolute return can be done using the following formula:

[(Current NAV- Initial NAV)/ Initial NAV] x 100.

Let’s put the values of the example in this formula.

[(20-15)/15] x 100 = [5/15] x 100 = 1/3 x 100 = 33.33% (approximately)

So, the absolute returns for the ULIP is around 33.33%, showing that the investment grew by 33.33% after the initial investment.

Now you know what absolute returns are in ULIPs, but there is another type of return in ULIPs. This return is known as the compound annual growth rate. The compound annual growth rate refers to the mean of the annual rate of growth of a ULIP in a specific period. The returns given by the ULIP also depend on factors such as mortality charges, administrative fees, fund management fees, and premium allocation fees.

Benefits of ULIPs

ULIPs are popular because of their dual benefits, as they offer insurance coverage and investment in funds within the same scheme. The benefits of ULIPs are as follows:

Dual Advantage

One of the main benefits of ULIPs is that they offer life insurance and investment benefits. It also provides financial security to the taxpayer’s family member in case of an unfortunate event.

Tax Benefits

You can also save taxes when you invest in ULIP. Premiums paid for ULIPs are eligible for tax deductions under Section 80C. Also, the returns you get from ULIPs are tax-exempt under Section 10D of the Income Tax Act.

Ideal for the Long Run

If you are a long-term investor seeking financial protection and some returns, ULIP can be the right option, as this scheme compounds your money in the long term, and the returns tend to be higher. Moreover, the ULIP investment option offers you better returns than traditional investment options such as FDs. But the risk is also higher, and you must invest long-term to get the gains.

ULIPs are flexible

ULIPs offer various investment funds. You can choose from the following funds—debt, equity, balanced or hybrid. You can select the fund based on your knowledge, risk appetite and return expectations. Not just that, ULIPs also provide the option of changing funds per your changing needs.

Absolute Returns in ULIPs

ULIPs provide promising absolute returns on your investment due to the compounding effect. There is a high possibility that you will get higher returns if you stay invested for the long term.

The Bottom Line

ULIPs offer a unique blend of insurance and investment, making it an ideal option for long-term investors seeking insurance security along with investment gains. Remember that every small investment counts when you want to secure your future. Happy investing!

Frequently Asked Questions (FAQs)

What are the risks involved in ULIP?

The risk level in ULIPs depends upon the investment fund you choose. Equity funds entail higher risk, while debt funds have a low risk.

What are the returns provided by ULIP?

The returns ULIP provides depend on the investment funds you choose. Equity funds give higher returns in the long run but also have higher risk. However, balanced funds offer good returns with lower risk than equity funds. On average, you can expect 10-12% returns, higher than bank FDs.

How long is the lock-in period for ULIP?

These plans have a lock-in period of 3-5 years. Hence, it is ideal for long-term investors who do not mind keeping their money invested.