ULIPs are insurance cum investment plans that allows the investment of funds to meet the long-term financial obligations along with providing life insurance coverage. Under the ULIP, Part of the premium amount paid is diverted towards the funds opted for, & the remaining amount is allocated towards life insurance.
A ULIP return calculator is an online tool that helps in calculating the potential returns on investment made under ULIPs. By just entering the desired amount of investment & its tenure, the calculator will assess the maturity value. Thus, it helps in making well-informed decisions to attain financial security. It also helps in comparing different investment options available &assessing the potential for achieving financial objectives.
One should compare the costs involved & returns received before investing your funds in any of the financial products. A ULIP return calculator is one of the most popular financial tools that can be used to help you plan & evaluate investments in ULIPs, considering various factors, like premium amount, tenure, age, rate of return, etc.
Reasons to Use the ULIP Calculator
Provided are some of the reasons why a ULIP calculator should be used by everyone:
- Financial Planning
By providing the amount to be invested, investment tenure, & expected rate of return, one can ascertain the maturity amount. ULIP calculator also helps in financial planning, by evaluating different investment options & hence making well-informed decisions.
- Objective Setting
It helps in setting realistic objectives&analysing the amount of investment required to achieve them. It helps calculate the investment amount that will be required to accomplish goals such as a child’s education, buying a house, retirement planning, etc.
- Investment Comparison
Provide investment-related data for all suitable investment plans that are under consideration to compare their potential return amounts. It allows you to evaluate & select the plan that best suits your needs & risk tolerance level.
- Risk Assessment
ULIP calculators also help to assess the risk associated with different investment plans. It allows for assessing what market fluctuations will result from a change in the expected rate of return. By assessing the risk, one can make a well-informed decision depending on the risk acceptance level & investment goals.
- Flexibility Analysis
It helps to analyse the flexibility of ULIP plans by assessing the outcome of switching between the funds. Also, it helps evaluate the number of potential returns dependingon the date provided.
- Investment Monitoring
It acts as a tool that can be used to monitor the investment’s progress by providing the actual returns & thereafter making adjustments.
Formula to Calculate ULIP Returns
There are two formulas available to calculate returns using a ULIP calculator. Let us evaluate them:
- Absolute Returns
It depicts the percentage increase in the value of ULIP over a period of time. The negative return shows depreciation, & the positive one shows an appreciation in the value of an asset.
Absolute returns = [(Current value – Value at the time of purchase) / Value at the time of purchase] x 100
For instance, the initial NAV = INR 250
Current ULIP NAV = INR 350
Absolute Returns = {(350 – 250) / 250} * 100 = 40%
- CAGR ( Compound Annual Growth Rate)
The compounded annual growth rate depicts the annual growth of an investment over a specified period of time.
CAGR = {[(Current value / Value at the time of purchase) ^ (1 / number of years)] – 1} x 100
For instance, the initial NAV = INR 25
Number of Years = 5
Current ULIP NAV = INR 35
Absolute Returns = {[(35 / 25) ^ (1 / 5)] – 1} * 100 = 6.96%
Criteria to decide the Method to be used
Provided are the criteria that can be used to decide the method to be used for calculating ULIP returns:
- Time Period
In case of short-term investment, opt for the absolute method as it is a straightforward method. &, in case of a long-term investment, opt for CAGR as it will provide a distinct vision of annualised growth over a certain time limit.
- Investment Type
In case of a one-time investment, the absolute method is appropriate as it provides a quick glimpse of your returns. In case of long-term wealth creation, CAGR is an appropriate method, as it takes into account the power of compounding over the investment tenure.
- Complexity
The absolute method isconsidered to be a straightforward mode of calculation& is considered ideal for making quicker assessments.
On the other hand &, CAGR uses a complex method to calculate the average annual growth rate, letting you assess the performance of an investment.
How should we use a ULIP Return Calculator?
Provided are the steps to use a ULIP return calculator:
Step 1:Choosing the type of ULIP investment
Choose the type of investment plan in which funds are to be invested, i.e. one-time investment or regular investment. Choose the plan that best suits your investment objectives & risk tolerance level.
Step 2:Enter the premium amount
Provide the premium amount that you will be paying on a regular basis throughout the policy tenure towards the investment plan.
Step 3:Enter interest rate
Provide the annual rate of interest.
Step 4:Input investment tenure
Provide the policy tenure for which you desire to invest your funds.
Step 5:Estimating the returns
The ULIP calculator will now calculate the potential return on your investment using the premium amount, tenure, & any other additional details required.
Conclusion
ULIP Return Calculator is a simple, easy-to-understand, and effective tool that helps us ascertain the premium amount along with the expected rate of return. It also helps in choosing a portfolio depending on the willingness of investors to take the risk. However, these calculators also work on a presumption & past performance basis, & they may not deliver the results accurately. Hence, it is advised to be more cautious while using calculators before investing in ULIPs.
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