Absolute Returns in ULIPs: Everything You Need to Know

 

In this policy, the investment risks in the investment portfolio is borne by the policyholder

ULIPs or unit linked insurance plans constitute long-term investment plus insurance schemes offering dual perks of market-linked gains as well as life insurance cover. With any insurance scheme, there is a premium involved which policyholders have to pay for buying and maintaining the insurance. In a ULIP, part of your premium is allocated to life cover and the other part to investment. This investment is usually in market securities. This is connected to market performance, so a ULIP generates returns over a set period. These returns are referred to as absolute returns in ULIPs.

What are Absolute Returns in ULIPs?

Another term for absolute returns is total returns. This is due to the fact that these returns actually refer to assets and their value that is gained over a period - the horizon of the investment in question. The value of the asset can appreciate or depreciate, based on the market performance. Furthermore, the asset could be a blend of debt funds and stocks. From the point of view of an investor, the absolute returns in ULIPs are either the profits or losses from a ULIP taken on a yearly basis.

How to Calculate Absolute Returns?

Absolute returns are computed on any ULIP’s net asset value. Absolute returns are expressed as percentages of initial net asset values or NAVs. For instance, if you bought a ULIP with an NAV equal to Rs. 50, increasing to Rs. 100 by the close of the year (financial year), 50% would be the absolute return. Therefore, the absolute return refers to a measure of the way the ULIP has performed. Such a method helps you to determine your gains according to the capital you have invested.

While you should know all about absolute returns in ULIPs, you should also be aware of the types of returns in ULIPs. Essentially, there are two types. You already know about absolute returns. The other type of return in a ULIP is referred to as the compound annual growth rate. This translates to the mean of the annual rate of growth of a ULIP taken over a particular period, lasting above a year. The returns which are generated are subject to several charges like mortality charges and fund management fees, administrative fees, premium allocation fees, etc.

Benefits of ULIPs

ULIPs are well-liked as investment plans go. This is largely because of their dual nature of investment and insurance in a single scheme. They offer investors great benefits and these are highlighted below:

• Dual Advantages

  ULIPs provide life insurance with the advantages of investment in market-related instruments.

• Financial Protection

  ULIPs offer financial security to beneficiaries in the event of the unpredictable demise of the holder of the ULIP policy.

• Tax Benefits

  Premiums which are paid towards ULIPs are eligible for deductions of tax based on Section 80C/Section 10(10D) of the Indian Income Tax Act (1961)^#.

• Long-Term Investment

  ULIPs aid you in achieving your goals in the long run.

• Absolute Returns in ULIPs

  ULIP investments give absolute returns and are subject to the effects of compounding. Hence, you get high returns in the long run.

• Flexible Schemes

  ULIPs give investors the flexibility to switch funds, changing between equity and debt funds.

Conclusion

To cut a long story short, a ULIP is a great investment. It has the ability to generate higher returns compared to traditional instruments like fixed deposits, PPF and NPS, and is less risky than mutual funds. When you invest, the idea is to start your investment early in your life so you have a longer time span to accumulate wealth. ULIPs give investors the power to compound wealth, especially if ULIPs are opted for as long-term investments. A ULIP not only gives you the benefits of long-term goal-based investing, but also comprehensive insurance cover so you don’t have to be concerned about your loved ones in the case of your untimely demise.

Related Articles

• What is ULIP Plan
• Benefits of ULIPS
• Understanding ULIPs and their Benefits
• 6 Tips to Maximize your Gains from ULIP

ARN – ED/10/22/30043