Since 2008, as the IRDAI (Insurance Regulatory and Development Authority) has revised the ULIP’s fee structure, it has gained immense popularity and emerged as an attractive investment option for retail investors. Many experts believe that altering the fee structure has made ULIPs more customer centric. The hybrid nature of the instrument, which includes life insurance protection and investment opportunity, add to the popularity of ULIP.
However, many people still believe that investing in ULIP is risky as the returns are market-linked. The truth is, if you invest prudently, you can expect to get excellent returns like any market-linked product offer. The returns you get depend on various factors like the funds you invest, timely switching your funds to ride the market volatility, redirection of premiums, etc.
Potential returns and risks in ULIP investments
When you invest in ULIP, you have the flexibility to choose from a wide range of investment options to suit your specific needs. You can pick from large-cap equity funds, mid or small-cap equity funds, ultra-short bonds, and secure funds as per your preference. All these funds work differently and provide different growth options. Typically, equity funds have high risk-reward potential, while debt funds are less volatile and provide stable returns.
Let us look at the returns potential from your ULIP investment in different funds.
| Funds Type | Average Returns in % | Maximum Returns in % |
| Large-cap equity funds | 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 the returns on your ULIP investments?
There are two ways to calculate ULIP returns.
- CAGR (Compound Annual Growth Rate): It helps you calculate the annual growth of your investment over a period. CAGR uses the end value of the plan, the Net Asset Value, and the total number of years for which you hold the investment. The formula for determining the CAGR is:
CAGR = {[(Present NAV/Initial NAV) ^ (1/Number of years)]-1} *100
- Absolute Returns: To calculate the absolute returns on ULIP, you must know the NAV. The formula for computing Absolute returns is:
Absolute returns = {(Current NAV – Initial NAV)/Initial NAV} *100
Tips to maximise your returns in ULIP investment
To get the most out of your ULIP investment, you must balance the debt and equity ratio in your portfolio. To decide the right ratio, you must remember the thumb rule – subtract your age from 100 and invest the remaining percentage in equity funds. Therefore, the lower your age, the higher your investment in equity funds will be. And, as you grow old, you can switch your fund from equity to debt funds.
If you cannot actively monitor the funds’ performance, you can manage your investments using the programmed switching option available with ULIP. It allows you to switch your investment in one fund to another based on its performance and market movement. This way, you take maximum advantage of the market volatility and get higher returns.
If you think the equity market is expensive and overvalued, you can switch your investment in equity funds to debt funds and then switch back again to equity when the market is performing well. Many insurance companies also give you the option of auto-trigger, which allows you to switch funds based on the underlying assets’ behaviour automatically.
Final Word
Statistics suggest that ULIPs offer the best returns compared to other insurance products in the market. Being prudent with your investment and understanding the investment market will help you make the right investment decisions and get high returns.
