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Which is better – ULIPs or NPS?

Earlier, people were hesitant to invest in any new financial products and simply relied on information shared by friends and family. However, the perspective of individuals has transformed over time, and now, individuals make sound decisions after researching thoroughly. With a variety of financial instruments available out there, making the right choices can get confusing. For the long haul, there are several factors that one needs to consider before narrowing down their choice.

There are government schemes that are safe to invest in, like Nation Pension Scheme (NPS), where money is safely invested in a post-retirement pension plan. While there are private investment options, like a Unit Linked Insurance Plan (ULIP), which is a combination of investment and insurance. Before comparing NPS and ULIP, it is first important to understand their meaning.

What is a ULIP policy?

ULIP is a life insurance policy with dual benefits since it also offers an investment component. It ensures that, along with protecting the life of the policyholder, there is an opportunity to earn interests on the funds of their choice. This ensures that in the policyholder’s absence, their loved ones are taken care of in their absence. Also, being invested in it for the long term ensures that the policyholder can meet their financial goals.

What is NPS?

When an individual earns their salary or profit, they eventually start planning for their retirement. Usually, the aim of every individual is that their lifestyle is not affected even after they stop getting their paycheck and they live a quality life. NPS is a type of saving scheme where the investor contributes regularly and can use their investment after retirement. The collected funds are usually partly withdrawn to meet the post-retirement requirements, and the remaining is disbursed to investors as a regular income, also known as a pension. NPS is a government-backed initiative that helps in building a retirement corpus.

What is the difference between ULIP and NPS?

For comparing any financial instrument, there are always some factors where one is better than another and vice versa. Here are some factors a where ULIP differs from NPS:

  • Return on investments
    NPS is a government savings scheme that offers minimal interest. The interest rate is fixed and comparatively lower than that of a ULIP. ULIP insurance allows investors to choose their funds based on their risk appetite, be it equity, debt, or moderate funds. Equity funds have proven to offer huge returns for the long haul. NPS has fixed returns while the returns of ULIPs fluctuate based on market fluctuations.
  • Risk appetite
    Depending upon the risk that you will take, you can choose the investments of your choice. NPS is a safe investment, as it is a government-related scheme. A ULIP offers a variety of choices for investors to choose from based on their risk appetite. If you will take high risks, you can choose to invest in equity funds. While if you do not want to take any risks, there are debt funds where your money is safe. There are also balanced funds available, where the funds are partly invested in equity and partly in debt, so the risk and reward are balanced. One of the unique ULIP benefits is that you can switch funds anytime you want from debt to equity and vice versa. Since they are market-linked funds, the ability to switch enables policyholders to make the most of market volatility. 
  • Cost of investment
    NPS is a low-cost investment since it is a government-oriented savings scheme for retirement. While ULIP insurance is a combination of insurance and investment, there are several factors associated with it. Hence, for those factors, there are also charges that one needs to pay when they buy a ULIP.

Which one should you buy?

NPS and ULIP are totally different types of investments. Depending upon the opportunity that an investor is looking for, they would make their choice. NPS is ideal for investors who are looking for a safe and low-cost plan which will meet their post-retirement financial needs. While a ULIP benefits those investors who will diversify their portfolio and earn high returns. Along with that, they also provide life insurance to the policyholder. Smart investors usually prefer to blend both, since they serve different purposes, and both would come in handy to meet their retirement goals.