ULIP Returns expectations

ULIPs have emerged as an attractive investment option under the revised IRDA (Insurance Regulatory and Development Authority of India) guidelines. The cost and fees structure of ULIPs under these guidelines have been significantly reorganised.

These re-organised ULIP schemes have become more customer-centric. However, people still think it’s risky to invest in ULIPs, due to its market exposure. The fact is that if one invests judiciously in ULIPs, he/she can earn the best returns that any market linked instrument can provide.

The choice for funds, redirection of premiums, timely switching and other options ensure that the growth of the fund is healthy. In addition, one more important thing to understand is that ULIPs are long term investment vehicles. Therefore, only with disciplined investments, they give attractive returns over the long term while providing life cover.

Risks and Returns in ULIPs

ULIPs provide investors with a bundle of investment options, depending on their requirements. Thus, the returns differ as per the nature of the investment option chosen by the investor. One can pick the Large-cap equity, Mid or Small-cap equity, Ultra short-bonds and Secure fund according to his/her preference. All these funds are different in nature and provide varying growth options. Some of them are high-risk as well as high-growth possibilities, while some offer low-risk and stable returns.

The primary determining factor of risk and return in ULIPs is the asset allocation. It ensures that your returns get balanced out - it means that any losses incurred in an asset class will be balanced by profits made on other asset class. Moreover, the best feature of ULIPs is that they allow free switches between funds, giving investors option to switch funds according to market changes.

Category Returns from ULIPs

According to research from Morningstar India, the returns provided by different ULIP funds in the past year.

Funds Average Returns (%) Maximum Returns (%)
Large-Cap Equity 9.57 15.18
Mid and Small-cap Equity funds 16.81 24.43
Conservative Funds 7.37 9.21
Short-Term Bonds 6.6 7.87
Ultra-Short Bonds 6.59 7.89


How to Calculate ULIP Returns

  -  CAGR: Compound Annual Growth Rate helps the investors in calculating the annual growth of their investments over a period of time. The formula which can assist investors in determining the CAGR is straightforward. It utilises the end value of the plan, its NAV (Net Asset Value), and the total number of years for which you hold the ULIPs.

CAGR = {[(Present NAV/Initial NAV) ^ (1/Number of years)]-1}*100

  -  Absolute Returns: In case of absolute returns, you only need to know the (NAV) and the current NAV to determine the returns.

Absolute returns = {(Current NAV – Initial NAV)/Initial NAV}*100

Other than these, investors can also use the option of ULIP returns calculator available online. These calculators allow investors in determining the potential value of their investments in the future. One just needs to fill in some details like the premium payment frequency, capital amount, investment horizon and annual post-tax returns to find out their annual returns.

Tips to Get Better Returns with ULIPs

1. Balance your Debt and Equity Exposure
To get the best out of ULIP investments investors need to balance the equity and debt ratio in their ULIP investments. To choose the ratio, they should keep their life stage needs in mind. Experts suggest a thumb rule, that says an investor should subtract his/her age from 100 and invest the remaining percent in equity. Therefore, lower your age will be higher will be equity investment. And as the age increases investor can reduce his/her equity exposure and move the investments towards debt.

2. Take Advantage of the Switching Options
If an investor feels he/she does not have time to monitor the investments actively. They can manage their portfolio, by using the programmed switching option available with ULIPs. For example, they may decide to switch a fixed amount on a periodic basis from one fund to another fund.

3. Understand the overall economic scenario
If equity markets look overvalued and expensive, investors can switch from equity to debt funds and switch back when equity markets are providing profits. Many insurance funds also offer the option of auto-trigger. It allows automatic switching based on the behaviour of the underlying assets in the fund.

The Takeaway

There has always been a major misconception that ULIPs provide lower returns. Statistics suggest that ULIPs give the best returns when used judiciously. ULIPs can help the investors in achieving their life-goals once understood correctly. However, as ULIPs are market-linked investment options, no exact value of returns can be determined.