NPS vs Mutual Funds

Retirement planning is a vital aspect for any investor. When it comes to retirement, investors are often confused between the two popular investment options – NPS and mutual funds. This article will serve as an investment guide in helping you choose the right security for your investment portfolio.

What is NPS?

National Pension Scheme or NPS is backed by the government of India. This pension scheme is open to all employees in public, private, and even unorganised sectors, except for the individuals in the armed forces. It allows subscribers to invest and claim tax deductions under Section 80CCD(1). NPS encourages individuals to invest in a pension account at regular intervals during their employment period.

What is a mutual fund?

It is an investment vehicle wherein an AMC pools the money of several investors and invests it in different securities such as stocks, money market instruments, bonds, etc. A fund manager professionally manages the pooled investment and invests it in a combination of debt funds, equity mutual fund, cash and cash equivalents, etc. according to an investor’s financial portfolio. These fund managers are mutual fund experts that hold in-depth knowledge and understanding of the unpredictable markets. In exchange for this service, the fund houses charge a small expense ratio, which is the annual maintenance fee to manage your mutual fund investments.

NPS vs Mutual funds

The following table summaries the differences between NPS vs mutual funds

ParameterNPSMutual funds
Equity exposure50-75%Depends on the mutual fund scheme chosen (max is 100%)
Minimum contributionA minimum of Rs1000 is required for investments in Tier-1 account each fiscal year, whereas, for the Tier-2 account, the amount is Rs20No minimum amount to invest in mutual funds. As an investor, you can choose to invest as low as Rs100 in any mutual fund scheme
Maximum contributionThere’s no limitThere’s no limit
Lock-in periodTill retirement or till an investor turns 60 years of ageMost mutual fund investments do not have any lock-In period
Pre-withdrawal options20% of the total corpus can be withdrawn before retirementFor mutual funds with a lock-in period like ELSS funds, funds cannot be withdrawn before the completion of the lock-in period
Average returns offered8-10%12-16%
Risk involvedLow riskInvestments in mutual funds are subject to market risk
Tax on capital gainsThe entire pension amount is exempt from tax under EEE statusEarnings on mutual funds are subject to LTCG and STCG, depending on the holding period

What should I choose?

The decision to choose between these two diverse investment options entirely depends on your age, income earned, risk appetite, financial goals, investment duration, and your retirement kitty. If you are on the lookout for a relatively safer investment option that helps to build you a retirement corpus, then NPS could be your to-go choice. However, if you are open to market risks to achieve significantly higher returns, you might consider investing in mutual funds. You might also consider availing the services of a mutual fund expert, who can guide you through the investment process and help pick the apt instrument for your investment portfolio. Happy investing!