Here is everything you need to know about Absolute Returns in ULIPs.
Unit Linked Insurance Plans are long term insurance cum investment schemes which offer dual benefits of market linked returns and life cover. When you invest in a ULIP, a part of the amount is investment in market-linked funds, while the remainder is utilised as premium for insurance cover. Since it is linked to the performance of the market, a ULIP with generate returns over a fixed period of time known as absolute returns.
Absolute returns are also known as total returns as these returns refer to the value gained by assets over an investment horizon. The value can either appreciate or depreciate, depending on the performance of the market. The underlying asset is a mixture of stocks and debt funds. For an investor, absolute return is the profit or loss made by a ULIP on an annual basis.
How to Calculate Absolute Returns?
Absolute returns are calculated on the net asset value of a ULIP. It is expressed as a percentage of the initial NAVs. For example, if you purchased a ULIP scheme with an NAV of Rs. 50 which increases to Rs. 100 by the end of the financial year, the absolute return is said to be 50%. It is a measure of the plan’s performance. This method only helps you determine your returns based on your capital investment.
Types of Returns ULIPs offer two types of returns - Absolute Return and Compound Annual Growth Rate. The latter is the mean annual growth rate of a ULIP over a specified period of time longer than one year. The returns generated are also subject to a number of charges such as fund management fees & mortality charges, premium allocation charges, administrative charges, etc.
Benefits of ULIPs
Here are the key benefits of ULIPs:
- ULIPs offer life coverage along with the benefits of investment in the capital markets.
- ULIPs provide financial security to the family in case of an unfortunate demise of the policyholder.
- Premiums paid towards a ULIP scheme is eligible for tax deductions as per Section 80C and Section 10(10D) of the Income Tax Act, 1961.
- ULIPs help you achieve your long term goal.
- The investment in a ULIP is subject to compounding returns. Therefore, the returns generated will be higher in the long run.
- ULIPs offer the flexibility of switching funds between debt and equity funds.
In short, ULIP is a good investment option. It generates higher returns in comparison to mutual funds and traditional instruments such as FD, NPS and PPF.