NAV Explained The Importance of Net Asset Value in Investing

One of the strongest reasons to strive for success in life is the desire to accumulate wealth to ensure a comfortable lifestyle for yourself and your loved ones. You do try your best to meet all their needs, wants and desires.

Investing in financial instruments that can help you grow your wealth and build a strong asset portfolio is always recommended, no matter your current income level. Unit Linked Insurance Plans or ULIPs are a unique financial tool that come with a Net Asset Value (NAV) that plays an important role in their performance.

What is a Net Asset Value or NAV in ULIP?

Net Asset Value (NAV) is a measure of the market value of each unit of a Unit Linked Insurance Plan (ULIP) fund. It is calculated by adding the market value of all the investments in the fund and dividing it by the number of units in that fund. However, it is important to note that NAV does not indicate the prospects of the ULIP fund and should not be used as the sole basis for investment decisions. The returns on an investment in a ULIP fund are determined by the performance of the underlying stocks, regardless of the current NAV.

How is NAV calculated?

The Net Asset Value (NAV) of a Unit Linked Insurance Plan (ULIP) is a measure of the market value of each unit of the fund. It is calculated by taking the total value of all the units in the fund, subtracting any expenses, and then dividing that number by the total number of units. This value can be used by investors to track the growth of their fund. By calculating the percentage increase in NAV, an investor can determine the real increase in the value of their investment. Therefore, NAV provides valuable information about the performance of a ULIP fund.

The NAV can be calculated using the following formula:

(Market value of the investment held by the fund + value of current assets) - (Value of current liabilities and provisions, if any) / Number of units existing on the valuation date.

The liabilities and provisions include costs associated with managing the fund. The following example illustrates the calculation:

Suppose you pay a premium of ₹ 80,000/- and buy a ULIP.

Another investor contributes ₹ 50,000/- for the same ULIP.

After deducting basic costs like mortality charges , let's assume your investment amount becomes ₹ 78,500/-. Likewise, the other investor's input becomes ₹ 49,500/-

Thus, the total amount the insurance company can invest in market funds is ₹ (78,500 + 49,500) = ₹ 128,000/-. This sum is the net market value of the invested fund.

Now, the insurer creates units each with a face value of ₹ 20/-.

Hence, the total number of units = 128,000/ 20 = 6,400 units

counterBased on this face value, you will hold 78,500/ 20 = 3,925 units. This is because your contribution was ₹ 78,500/-.

If the investment brings profits, the net investment value will increase. Say, the fund's net value rises to ₹ 1,50,000/-. As a result, the NAV also changes. But the number of units remains the same until you purchase new units by paying the next premium instalment.

The new NAV can be determined by dividing the new net fund value (i.e., ₹ 1,50,000/-) by the number of units existing in the fund (6,400 in this case).

Thus, the new value of each unit in the fund is now ₹ 1,50,000/ 6,400 = ₹ 23.43/-

And the net worth of all your units is now 3,925 X ₹ 23.43/- = ₹ 92,092.75/-. Therefore, you have made a profit of ₹ 13,592.75/-

Conclusion

ULIPs provide flexibility in terms of investment strategy, allowing you to allocate your funds among different asset types such as equities, debt funds, or a combination of both. This gives you the ability to adjust your investment strategy based on market conditions, for example, switching to debt funds during a market downturn to protect your funds and shifting to equities when the market recovers to take advantage of higher returns.

ULIPs help to diversify investment risk and have the potential to generate significant profits over the long term. Therefore, when planning for your financial goals, it is recommended to include ULIPs in your investment portfolio.

 

Swati Tumar - Travel & Finance Writer

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.