What is a ULIP?
In this type of policy your premium is invested in the market for maximising your savings. It is similar to an investment opportunity like MFs (Mutual Funds) where investors purchase units at their NAV( Net Asset Value) from a fund, but with the added benefit of having insurance cover. That's why the term linked is involved. Your insurance is linked to a Unit Fund. On the occurrence of death, the plan pays out the nominee either the insured sum assured or the value of your fund amount whichever is greater. Also on maturity of the investment term, you get your fund amount.
What is NAV?
To understand NAV first you need to understand how a Unit Fund is created. The money from all the investors is pooled together to form one large corpus. This money is later invested in the markets. To help divide the returns on investment, the fund manager divides the corpus amount into units with a certain face value. Each investor then has a share of units in the fund depending on how much money he pooled. Hence to start with, the value of each unit is considered the NAV i.e. Net Asset Value. Once investments are made in the market, the total value of the fund can increase or decrease on a daily basis and hence accordingly the NAV also increases or decreases. The formula used to calculate is NAV* = "(Market Value of Investments held by the fund + Value of Any Current Assets) - (Value of Current Liabilities & Provisions) / Number of units existing at valuation date (before creation / redemption of any units)"
*NAV Calculation Formula as per IRDA
Example of NAV calculation
In reality there will be thousands of investors for a particular fund. For better understanding let's take a simple example with two investors Mr X and Mr Y. Mr X contributes Rs 40,000 and Mr Y contributes Rs 30,000. Now there will be deductions for various costs like fund management fee, mortality charges, etc. Let's assume that after the charges are deducted Mr X has Rs 30,000 left and Mr Y has 20,000 left.
Hence the net amount available to invest is Rs 30,000 + Rs 20, 000 = Rs 50,000.
The fund manager wants to create units with a face value of Rs. 10 each. Hence Mr X has 30000/10 = 3000 units and Mr Y has 20000/10 = 2000 units. Total number of units in the fund is 5000.
NAV = Net Value/Number of units => Rs 50000/5000 = Rs 10
Let's consider that after investing there is a profit and net value of the fund increases to Rs 58,000. Now there is a new NAV for the fund.
NAV = Rs 58000/5000= Rs 11.60
Hence the investors have a profit of Rs 1.60 per unit invested.
If after a few years, the value of the net value of the fund increases to Rs 1, 00,000 then NAV would change to Rs 20.
The value of NAV is dependent on the value of the fund. As the value of fund changes according to market conditions, the NAV value changes. Hence at the end of every working day, the fund managers re-calculate the NAV and post the updated value on their website. Hence you can conveniently track the Net Asset Value of your fund.
Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
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