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The performance of any financial instrument over the years is important for an investor as it gives an idea of how profitable the instrument is. With direct investment options, such as stocks and shares, one can easily track the performance on a daily basis. 

When it comes to slightly complex financial instruments, such as a ULIP or Unit Linked Insurance Plan, the manner of tracking the performance is different. What is a ULIP? It is a unique life insurance product that offers an opportunity to invest in multiple financial instruments along with life insurance coverage. There are various ways one can track their ULIP performance, with each method having its pros and cons. We take a look at the same in this article. 

How does a ULIP work? 

Understanding how ULIPs work is paramount to being able to track and analyse the investment part of it. Unlike with other investment options, you do not have to directly park the money in the instrument. Rather, the premium that you pay towards this life insurance plan is divided by the insurer and parked away for two different purposes. One portion helps build and retain your insurance coverage, and the other is invested in different investment avenues.

One has the option to choose between equity ULIPs, debt ULIPs, and hybrid ULIPs, depending on their risk appetite. You can get an approximate idea of the returns you may gain with each kind of fund option with the help of a ULIP calculator.

It is also to be noted that ULIPs have a lock-in period of five years. The investor can withdraw returns from their ULIP only after this lock-in period is over. 

How to track the performance of your ULIPs

The two popular ways of measuring ULIP performance are:

Absolute returns

Absolute returns are a metric by which one can gain an understanding of how much their ULIP investment has grown from a certain point to the present time. Hence, these kinds of returns are called point-to-point returns. The absolute returns figure is displayed through a percentage. To measure absolute returns, you must follow the following steps: 

  • Take the initial NAV figure and subtract it from the current NAV 
  • Now, divide the figure you obtained in the previous step by the initial NAV 
  • Lastly, multiply the figure obtained in the previous step by 100 

The formula for the same is as follows: 

[(Current NAV – Initial NAV)/Initial NAV)] x 100 = Absolute Returns 

  • Where absolute returns may be useful: 

One should ideally use the absolute returns metric to evaluate their ULIP returns within a short period of time, like a year. 

  • Where absolute returns may be a drawback: 

Investments, especially those made for the long term, are subject to compounding. While absolute returns give a straight answer to how much your funds have grown, it does not specify the rate at which the funds have grown on average. Thus, one cannot use the absolute returns metric to track and analyse a long-term ULIP investment. 

Compounded annual growth rate (CAGR) 

The CAGR is an effective way of measuring the rate at which your ULIP investments have grown throughout the years while taking compounding into consideration. The formula for calculating the CAGR is as follows: 

{[(Current NAV/Initial NAV) ^ (1/No. Of years)] – 1} x 100 = CAGR 

Do not fret; you do not have to carry out this calculation manually each time to track your ULIP investments. Just like the ULIP calculator, you can also find CAGR calculators available online that help you get an idea of the growth rate after you have added the variables. 

  • Where CAGR may be useful: 

CAGR is especially beneficial to understand how your ULIP investments have performed or may perform over a long period of time. 

  • Where CAGR may be a drawback: 

CAGR does not take market risks into consideration. Hence, CAGR cannot assure you that your funds may perform at the same rate in the future as they have done in the past. 

Investments, especially in the equity market, are subject to volatility. According to experts, the best way to beat market volatility is to hold your investments for the long term. You may also want to reach out to a financial expert to know more ways of evaluating your investments that take your specific needs into consideration. 

We hope this article has helped you understand what a ULIP is and how you can track your ULIP investment in a better way. 

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