What Are Absolute Returns in ULIPs?

In today’s markets, there are many financial instruments that offer you the opportunity of safe investment to grow your wealth. While there are traditional options such as directly investing into the stock market, people also look for safer investment options. One such investment option that you can utilise is a ULIP.

ULIPs have been gaining a lot of popularity, especially among first-time investors. There are different terms that are used to describe the returns in ULIPs. One such term is absolute returns. What exactly are these returns? How do you calculate them? Read on to find out more.

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What is a ULIP?

A ULIP is a type of life insurance policy which offers the benefits of investment and insurance in the same plan. In this plan, you get to invest in equity, debt, and balanced funds. Equity and debt funds have a variating risk factor and offer variating returns. Balanced funds are a combination of both.

This plan also offers life protection cover to your loved ones from life risks. If you were to pass away during the term of the policy, your family would be compensated via a death benefit. This amount would help them manage vital expenses while having a financial safe future.

What are absolute gains?

Speaking in terms of investment, absolute returns mean the returns you get from your investment in an asset over a specific period of time. As there are many assets you can invest in, the definition for the absolute returns could vary. However, in ULIPs, absolute returns usually denote the returns that you gain during the initial period of your investment.

How to calculate absolute gains?

Absolute gains, also known as absolute returns, can be calculated using the following method:

The formula to calculate absolute returns is: [(current NAV-initial NAV)/Initial NAV]x100

In order to calculate absolute returns, you need to follow the steps:

  1. Know what your initial and current net asset value (NAV) is
  2. Subtract the initial NAV from your current NAV
  3. Divide the value that you from this subtraction by the initial NAV
  4. Multiply the sum of this division by 100

Absolute returns are the returns that you get when you calculate the difference between the current NAV and initial NAV of your policy. This type of return is also known as point-to-point return. While this method is quite easy, given that you know the values of the NAV, it is only useful when your calculations are based on the initial period of the investment. It would not give you an idea about the gains beyond the initial period.

What is the other way to calculate these gains?

While you can use the above method to calculate your gains from the initial investment, if you want to calculate annual gains, you can use the following method:

Compounded Annual Growth Rate (CAGR)

If you want to calculate the annual returns for a specific time period of your policy, Compounded Annual Growth Rate or CAGR is the method that is used to calculate those returns. Using this method, the policyholder can calculate the overall annual returns of their plan.

The formula for calculating the CAGR is: [{(current value of NAV/initial value of NAV)^(1/number of years)] – 1}x100

While CAGR might give you a mean value when you are looking to get the value of your annual returns, note that there is one drawback. It is does not take into account the impact market volatility has on your investment. Market fluctuations have an impact on ULIPs, meaning that your returns could either increase or decrease based on the state of the market. This might not give you an accurate figure.

If you want to calculate absolute gains, these were the methods you can use. Get in touch with your insurance advisor to know more about the calculation process. If you are looking to invest in the plan, you can use the ULIP return calculator to see what kind of returns you would get based on your investment.


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