As a policyholder, you might come across various jargons and technical terms in the policy document. Generally, these terms have an important significance towards the policy. However, to an average person, they could be highly confusing, or might get entirely ignored by them. However, it is prudent that you should understand the meaning of such terms. In ULIPs, one such term is the NAV. What is the meaning of this term? What are its functions in ULIPs? Read more to find out.
What is ULIP?
ULIP is a life insurance policy which provides the benefits of investment and insurance in a single policy. This is done by splitting the premium and directing them towards investment and life cover. In investments, you have the option of selecting either equity fund, debt fund or both. This should be done as per you risk appetite and your requirements. Life insurance cover is provided to your loved ones to protect them from life risks in your absence.
What is Net Asset Value (NAV)?
Net asset value is value per unit of the assets in a ULIP plan. Along with you, there are multiple investors in ULIPs. The insurer collects the amount paid towards the investment and uses it to invest in different market instruments. Based on the premium that you pay, you will be allotted units accordingly. The value of these units is what is known as NAV. Your number of units signifies how much your share is in the amount invested. This helps in the proper disbursal of the profits among other shareholders.
What is its function?
The value of all the units gets calculated and the expenses get subtracted from them regularly. The value that is derived from this is then divided by the total number of units. The final sum which you get is the net asset value for your ULIP. As an investor, this can be helpful in keeping a track of how your funds are performing in the market. You can also get an idea about how the actual value of your fund increases if you can determine the increase in the percentage of the NAV.
How is it calculated?
Net asset value is calculated by using the following formula:
NAV= (Market value of the investment held by fund+ Value of the current assets)- (Value of current liabilities and provisions, if any)/Number of units existing on valuation date
The value of current liabilities and provisions essentially means the cost that is incurred in managing and maintaining the fund.
For example, two people, John and Paul, decide to invest in ULIPs. John manages to invest Rs.60,000; meanwhile Paul manages to invest Rs.50,000. From these payments, the company deducts the charges associated with ULIPs, which leaves the final investment amount at Rs.59,500 and Rs.49,600.
The total amount comes to Rs.109,100, which the insurer will use to invest in different market funds. If the face value of the units created by the fund manager are at Rs.10 per unit, John will own 5950 units, whereas Paul will hold 4960 units, bringing the total number of units to 10,910.
The net asset value of the funds on the 1st day will be Rs.109,100, which is then divided by the total number of units, which is at 10,910. So, we get 10 as the remainder.
Assuming that there is a profit after the investment, increasing the net value of the fund to Rs.120,000. There will be a ULIP net asset value, which is calculated by dividing Rs.120,000 by 10,910, which is the total number of units. This calculation brings the new value of each unit to Rs.10.99. So, John and Paul make a profit of Rs.1.9 per unit.
This is all the information related to NAV in ULIPs. It basically decides the value of your ULIP fund. If you wish to know about other terms related to ULIPs, you can contact your insurance advisor.