# 3 Ways to Measure ULIP Returns Over Time

Under the new IRDA guidelines, the cost and fee structure of ULIPs have been made even more attractive for buyers, encouraging more and more investors to opt for ULIPs  ULIPs are often the go to investment option for middle-class people due to the dual-benefit of life insurance and investment benefits – both in one policy.

Under the new IRDA guidelines, the cost and fee structure of ULIPs have been made even more attractive for buyers, encouraging more and more investors to opt for ULIPs.

Maturity proceeds coming from ULIPs are also exempted from tax payment under Section 10D of the Income Tax Act, 1961.

To see any substantial returns on your investment in a ULIP, you need to give it a few years, as you would with other investment vehicles, such as Mutual Funds or SIP’s (Systematic Investment Plans).

However, you must keep in mind that Unit Linked Investments Plans witness ups and downs just like other investments made in stocks or equity.

An informed policyholder and investor is the one who keeps a check on her/his investment up-to date with how the market is performing.

Since ULIPs investments are similar to Mutual Funds, the method to track the returns is also similar. However, there are certain charges levied on ULIPs that one must keep in mind while analyzing the returns.

These charges are premium allocation charges, policy administration charges, mortality charges, fund Management charges, as well as surrender charges upon enchasing the policy after failing to pay premiums.

Here are three ways how you can measure the ULIPs returns over time:

### 1.     Point-to-point Returns or Absolute Returns.

To calculate the point-to-point returns or absolute returns of a plan, you only require the current NAV of the scheme and the initial NAV.

To calculate absolute returns,

• Subtract the initial NAV from the current NAV,
• Divide it by the initial NAV, then
• Multiply with 100 to arrive at a percentage.

Formula: [(Current NAV-Initial NAV)/Initial NAV] × 100

This method is effective when trying to analyze the performance of a ULIP that you have held for a short period, of about 12 months or less.

The method can be used at any time during the ULIP, but is only efficient in the initial phase, as it helps you calculate the simple returns on your initial investment.

Example: if the NAV of your shares at the time of purchase was Rs. 100 and is Rs. 150 after one year, the point to point return is 50%.

### 2.     Simple Annualized Returns

This method can be used to check the ‘affective annual yield’ of a scheme. It requires you to first know the point-to-point returns.

The simple annualized return helps calculate the average amount of money earned by an investment in a year.

It is expected to show how much the returns can be for the investor over a period of time if the annual returns were compounded.

To calculate the simple annualized returns,

• Add Absolute returns to one,
• Raise the whole to the power of (365 divided by the number of days you have held the policy for), and
• Subtract one.

Formula: [(1 + Absolute Rate of Return) ^ (365/number of days)] – 1

Example: following the above example where the absolute returns were 50%, the simple annualized returns for 6 months would be:

[(1+0.50)^(365/182)] – 1

= (1.50^2) – 1

= 2.25 – 1

= 1.25

Therefore, the simple annualized returns are equal to 125%.

### 3.     Compounded Annual Growth Rate (CAGR)

Compounded Annual Growth Rate (CAGR) can be understood as the growth rate from the initial to the end investment value, if one assumes that the investment has been compounding over the time period.

CAGR stands for a mean annual growth rate that does not take into account the volatility in returns over a period of time.

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

Example: if you invested 2 lakhs in a scheme via your ULIP with NAV Rs. 20 and now, the NAV is Rs. 40 after 24 months, the formula shall be:

{[(40-20)^(12/24)] – 2} × 100

= 24.72%

Therefore, Compound Annual growth Rate is equal to 24.72%.

These methods of calculating returns are applicable to investment vehicles that range from mutual funds to SIPs. However, returns of ULIPs are harder to analyze due to the different procedure of investment that involves different charges, benchmarks and allocation patterns.

By knowing how well any investment vehicle is performing, you can make the best of your opportunities. By understanding the differences in the various investment vehicles, you can invest as per the requirements and risk appetites and expect returns that are realistic.