In ULIPs, the investment risk in the investment portfolio is borne by the policyholder

ULIPs or Unit Linked Insurance Plans are a popular investment choice. They combine the benefits of insurance and investment to provide both security and high returns. In a ULIP, a part of the premium is directed towards a life cover^~ while the rest is invested in funds of your choice. You can choose between debt, equity or balanced funds as per your financial goals and risk appetite. However, before you invest in a ULIP, you must understand how ULIPs work and generate returns.

What is the meaning of ULIP returns?

ULIPs provide you with a life cover^~ for the financial security of your family while also boosting your income and helping you realise your long-term investment goals. The returns from your ULIP will be based on your investment choices as well as factors like ULIP charges and market performance.

How are ULIP returns calculated?

There are two ways to measure your ULIP returns:

Absolute returns:

This is the percentage increase in the total value of the ULIP. This total value is considered after deducting expenses like management fees and operating charges.

Absolute returns = [(Current value- Value at the time of purchase)/Value at the time of purchase] x 100

For example, if the value of your ULIP at the time of purchase was ₹ 250/- and one year later it becomes ₹ 350/-, in this case, your absolute return is 40% in a year. This method is useful for a plan which has a short tenure.

CAGR(Compound Annual Growth Rate):

As the name suggests, the CAGR method helps in evaluating the annual growth of your investment during a specific period. It helps you determine the rate of return received from your plan year on year.

CAGR = {[(Current value/Value at the time of purchase) ^{^} (1/number of years)]-1} x 100

For example, if the value of your ULIP at the time of purchase was ₹ 250/- and after five years its value is ₹ 350/-, in this case, the CAGR is 6.96%.

Alternatively, you can also use an online ULIP plans returns calculator to calculate your earnings.

Factors Influencing ULIP Returns

Below are some factors that can impact ULIP returns:

Market performance

ULIPs provide various fund options, including equity, debt and hybrid funds. The performance of a ULIP is directly tied to the underlying securities in your chosen funds⁺ and how they perform in response to market conditions. When these securities perform well in the market, you have the potential to earn higher returns. Conversely, if their performance is poor, your returns may fall short of expectations.

Fund management

ULIPs are managed by fund managers who make crucial decisions regarding the allocation of your premium across funds. The experience and expertise of the fund manager play a critical role in determining your investment returns. A more experienced and capable manager can enhance the potential of your investment.

Policy charges

A ULIP's average return can be significantly affected by its charges. ULIPs may charge premium allocation charges, fund management charges, surrender charges, Goods and Services Tax (GST) and top-up charges, among others. Higher charges can reduce your overall returns.

Investment tenure

The investment tenure can significantly influence your returns. A longer investment term provides more time for your money to grow and maximises the benefits of compounding. This can enhance your investment growth potential. On the other hand, a shorter term may introduce more volatility and risk and potentially lead to lower returns.

Different Risks & Returns involved in ULIP

In a ULIP, you get multiple investment options. You have the option to choose between low-risk debt funds, equity funds that provide high returns or balanced funds. All funds are different in nature and carry varied risks and rewards. Generally, high-risk funds offer greater returns, and low-risk funds give out stable but lower returns. Hence, ULIP returns depend on the funds you choose.

How to ensure high returns in ULIP?

Market outlook

You should keep a check on the market to determine the best time to invest in equity, debt and balanced funds. If you assess that the equity market is overvalued and expensive, you should switch to debt funds and later invest in equity when the equity market reaches the right level.

Switch funds to gain an advantage

Most ULIPs allow you to switch between funds without any cost, giving you the option to change your asset allocation as per the market conditions. This can help you tap into opportunities as well as protect your funds.

Stability in debt and equity ratio

Your ULIP can fetch better returns if you balance the amount you invest in equity and debt. At a lower age, a substantial percentage of your funds can be allocated to equity. As your age increases, your focus on equity funds should reduce and investment in debt funds should increase.

Set financial goals

Goal-based investing can help you stay focused on your target and invest for the duration required to meet your target. To ensure high returns from your ULIP, it is important that you stay invested for the entire duration of your plan. Goal-based investing will enable you to invest the right amount and stay invested for the entire duration, without being tempted to withdraw money midway.

Benefit from the power of compounding

The power of compounding refers to reinvesting your returns in the market to earn higher returns. In order to benefit from it, you must invest in your plan for the long term. The longer you stay invested, the more time your money will get to grow. As a result, the returns from your ULIP could be relatively higher.

Take advantage of ULIP tax^* benefits

ULIPs provide you with tax* benefits that help you increase the overall returns from the plan. You can claim a tax* deduction of up to ₹ 1.5 lakh subject to conditions under Section 80C of the Income Tax Act, 1961 and save up to ₹ 46,800 per annum in taxes. The amounts received under the policy are exempt* subject to conditions prescribed under Section 10(10D) of the Income Tax Act, 1961.

Benefits of ICICI Pru Signature (online)

ICICI Pru Signature is a flexible ULIP that can be used to cater to your financial goals. The plan provides you with a life cover~ to protect the financial interests of your loved ones in your absence. It also offers multiple options to help you invest as per your risk appetite.
Below are the key benefits provided by the plan:

Financial security

The plan provides you with returns that help you stay financially prepared for your goals. It also provides a life cover~ for the entire duration of the plan, safeguarding your loved ones against all odds. You can choose to get this life cover~ till 99 years of age.

Flexibility

The plan offers a wide range of choices like equity, debt, and balanced funds. You can invest in any one of these funds or in a combination of the funds as per your goals and risk appetite. You can choose the amount you want to pay as premium. You can also choose if you want to pay your premiums monthly, half-yearly or yearly, as per your convenience.

Low charges

Your entire premium paid towards the plan is invested in the funds of your choice, without any deduction. Additionally, mortality and policy administration charges are returned to you at the end of the tenure of plan. This ensures that you get higher returns on your investment.

Unlimited free switches

You can switch from one fund to another as many times as you want and take advantage of market conditions to earn higher returns. There is no extra cost for switching between funds^{^}.

Wealth boosters

The plan provides you with wealth boosters** at regular intervals of the policy. These are additional amounts that get added to your overall returns from the plan, helping you reach your goals faster.

Systematic withdrawals

You can systematically withdraw money from the plan at regular intervals. This helps you create a stable flow of income in addition to your regular income. You may also use this feature to meet your financial goals.

Tax^* benefits

ICICI Pru Signature provides tax* benefits subject to conditions prescribed in The Income Tax Act, 1961.
W/II/1558/2022-23

Conclusion

As an investor, you must evaluate market conditions and understand how to allocate your funds to get the maximum returns from your ULIP. ULIPs like ICICI Pru Signature provide higher returns while shielding your loved ones with a life cover^~. You get four portfolio strategies and several fund options to choose from that can help to maximise your earnings. The ICICI Pru Signature plan also offers unlimited free switches between funds, low charges, wealth boosters^**, systematic withdrawals and tax^* benefits, making this plan ideal for your needs.

People like you also read...