Also known as unit-linked insurance plans, ULIPs are financial products that create a mixture of life insurance coverage and investment. This offers policyholders the double benefit of financial protection and wealth generation. It helps you and your family prepare for the worst-case scenario with insurance coverage. At the same time, it can offer investment returns that you can achieve various financial goals with. These include buying a house, funding your child’s education, creating a retirement corpus, etc.
ULIP provides a wealth creation opportunity and life insurance cover. At the time of this investment, you have the option of choosing the funds that you would be comfortable with. This decision is often taken based on the returns you wish to have and your appetite for risk. Once the plan matures or at the time of a claim, you will receive an amount called fund value. The Net Asset Value (NAV) of the plan decides this amount.
What is Net Asset Value?
Net Asset Value (NAV) is the monetary value of every unit after it has been subtracted of the monetary value of any liabilities related to the investment fund. It is essentially the number that shows how much worth of funds you own. Any change that you see in the Net Asset Value is an indicator of how your ULIP funds are performing in the market. Hence, if you want to invest money through ULIPs, you need to understand NAV.
Just as you do, many other investors also make the premium payment towards the ULIP plan. If you are looking to calculate the premium, you can use a ULIP calculator available online. Once the insurance provider receives this money, it pools it with the money from other investors that wish to invest in the same fund that you wish to. After doing so, the insurance provider makes the investment in different market instruments. This is to ensure that your investments are large and diverse and have a higher chance of good returns.
Based on the premium you pay; you can buy a fixed number of units. Each of these units has a face value and all of them together create the total amount that the investment is worth. This is what is known as Net Asset Value. As the fund performs better, the value of each unit grows.
How is NAV calculated?
So far, you are aware of what NAV is and what its purpose is. However, there are likely to be many more doubts you might have. One of the biggest ones is how do you know what the NAV of your fund in. Since it is a major piece of information that you need to track your fund’s progress, it is important to know how your NAV is calculated.
The investment market is often very volatile. This means that there are major developments daily. For this reason, the NAV in ULIPs is calculated on every business day. Hence, you can simply check the new NAV every day and stay up to date on your fund’s performance. The formula used for calculating ULIP NAV is:
((Investment’s market value + Current asset value) – (Current liability value, if any)) ÷ Existing number of units on date of valuation.
All these factors mentioned in the formula are something that you should be paying close attention to when you manage a ULIP. Firstly, you will have to understand what each of these variables mean. Secondly, you need to be sure to calculate the NAV occasionally. The NAV is extremely important for both investing and if need be making a claim.