Thursday, August 16, 2012

Returns Comparison – NPS Vs. ULIP Pension Plans

The previous article was an analysis of the performance at the end of 3 years of the National Pension Scheme a.k.a NPS in India. Towards the end of the article, I had said that, I will post a returns comparison between the NPS and a regular ULIP Pension Plan. So, here we are…

Before we begin: Be prepared for the Shock of your Life when you actually see the number comparisons!!!

Let us say You and I are good friends and decide to invest Rs. 1 lakh every year for our retirement for the next 25 years. You spoke to an investment advisor who has convinced you to select a fantastic ULIP Pension Plan which he says is going to give you absolutely fantastic returns while I decide to invest in NPS Instead.

So, what will our investment be worth at the end of 25 full years?

To arrive at that number we need to make a few assumptions before hitting the calculator. Don’t worry, you don’t need to perform any calculations. I will do it for you and give you all the numbers.

a. Both of us invest the same fixed Rs. 1 lakh for 25 years making the total investment of 25 lakhs each
b. Both investments are going to give a uniform 9% rate of returns
c. Fund Management fee is payable as a % of the corpus. 0.25% for NPS and 2% for ULIP Pension Plans
d. Premium Allocation Charges is payable as a % of the amount invested (Freshly) every year. 0.25% for NPS whereas the Pension fund charges a Premium allocation charges as follows – 30% in the first year, 20% in the second and 10% in the third. After the third year they charge a flat 2% for all the remaining years

So, if we include all the above information into the calculator, the details workout to be as follows:

As you can see, my investments are worth 88.23 lakhs at the end of 25 years while your investments are worth 61.74 lakhs. A difference of over 25 lakhs which in fact is the amount that we both invested.

Why the Difference?

1. Difference in Fees/Charges – I Paid a flat 0.25% premium allocation charges and another flat 0.25% fund management charge whereas the numbers were much higher for the ULIP Pension Plan
2. I Paid a flat Rs. 250/- every year as Premium Allocation charges which works out to a total of Rs. 6,250/- for 25 years while you paid varying Premium allocation charges that work out to a total of Rs. 1,04,000/- for 25 years which is approx. 16 times what I paid
3. I Paid a flat 0.25% fund management charge (As a % of the total corpus that was being managed) to the fund house every year that works out to Rs. 1.81 Lakhs
4. Though your fund management charge was fixed at 2% per year, the total amount you ended up paying was Rs. 11.91 Lakhs
5. You paid approximately 12 lakhs more than what I paid as fees and this extra amount that got invested against my name too resulted in additional returns

If you want a Year on Year returns comparison between your ULIP Pension Scheme and my NPS, see the tables below:

ULIP Pension Plan Returns:

NPS Returns:

A Word of Caution:
The NPS is governed by the Government of India while ULIP Pension Funds are governed by the respective Insurance Company. So, technically speaking the returns in a ULIP may be 1 or 2% higher than the returns generated by NPS. But, the difference in terms of returns may not be more than 1 or 2%.

This is a big May Be because the Government is closely monitoring the performance of the NPS Schemes and hence, even this 1 or 2% difference too is highly unlikely.

Some Last Words:
Do I need to say that NPS is a better investment option than ULIPS? The main reason being extremely high charges in case of ULIPs. Why pay 12 lakhs to the ULIP Company to manage our money while an almost similar option is available at a much cheaper rate???

Happy Investing!!!


  1. Food for thought...

    Insurance is not about savings; we have an inverted system in India. Yes, ULIPs might have a role to play, but only in the right proportion. Insurance is about sum you need assured for the sustenance of your family!

  2. There must be a healthy relationship between returns and investments. Returns must grow over a specified period of time, if they are not then time to worry and going for other options.


  4. Excellent Anand...appreciate for educating us. one more word ... Rule of thumb " Never invest in a plan which comes to you ( via agents " they will eat away your money and can give any false statement" ) rather invest in a plan which you go research and invest ( mouth of talk or publicly appreciated). LAXMI BLESSINGS WILL NOT COME TO YOU... YOU HAVE TO USE YOUR BRAIN TO GET LAXMI BLESSINGS.... Got it?

  5. Excellent analytical views. AS NPS does not offer insurance, please make comparative study NPS Vs Pure pension plans and not ULIP which normally offer insurance also.

    1. True Suresh. But, ULIPs these days are being disguised as actual investments and mis-sold to people thats why this article was written

  6. Very Good Analysis..Makes sense..
    As a thumb rule, I think its always better to keep insurance separate from investments..Better to go for term insurance + Investment(MF, Equity etc.)

  7. Hhii Anand...I am 33 years old,my EPF Balance is 550000 (13 years of service).Should I invest more than 12% to get good amount on retirement? Is it sensible ?

    1. Yes, you can contribute more than 12% of your basic via VPF and it is a good option if you aren't worried about getting the money only after retirement because government pays a steady interest rate and the amount gets compounded interest every year until retirement,

      If you are looking for liquid savings where you want flexibility to withdraw when you need, VPF is a bad option.


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