NPS vs Mutual Fund: What is best for You?

NPS vs mutual fund: Building a secure after-retirement life needs due diligence and carefully thought out strategy. Saving and investing for retirement should be the most important aspects of your retirement planning. It is essential to start early and invest in asset classes that offer inflation beating returns. Since there are many investment avenues in the market, selecting the most suitable one can be confusing. NPS and mutual funds are two popular investment options that people consider to build their post-retirement corpus. 

NPS vs Mutual Fund: What is best for You?
NPS vs Mutual Fund

Before selecting an option, it is important to understand both investment options. In this article, we will draw a comparison between NPS and mutual funds as investment options and explain which one is better. Like resident investors, NRIs can also invest in mutual funds and NPS to secure their retirement financially. 

What is NPS?

Initially, the National Pension Scheme (NPS) was introduced by the government of India in 2004 for government employees. However, in 2009, the scheme became available to all employees from the public, private, and unorganized sectors. Investors can open an NPS account and make a recurring deposit throughout their employment. 

After retirement, you can withdraw a partial lump sum up to 40% of the accumulated corpus and the remaining 60% has to be reinvested in an annuity. You can get a standard deduction of Rs. 1.5 lakh on the investment amount under Section 80C of the Income Tax Act 1961. Under Section 80CCD of the IT Act, you can get a maximum deduction of Rs. 50,000 each fiscal year.   

Benefits of NPS

If you invest in National Pension Schemes, you will enjoy the following benefits:

  • The National Pension Scheme is a long-term investment avenue.
  • The NPS is backed by the government that carries minimal risk of loss. 
  • It offers tax advantages under different sections of the Income Tax Act – 80C and 80CCD of Income Tax Act 1961.
  • Since there is no strict law about the frequency of investment, you can start investing whenever you choose to as per your convenience. 
  • NPS withdrawal up to 40% of the accumulated corpus is tax-free upon retirement. 
  • Amongst seven accessible funds, NPS is the only investment option that permits investors to switch the fund manager once every fiscal year.
  • Investment in NPS is directed towards equity, corporate debt, government bonds, and annuities. Because NPS funds have exposure to a variety of assets, which lowers the risk of volatility in the equity market. 

What are Mutual Funds?

Mutual funds are kind of a basket of multiple and varied financial instruments that generate income over a period of time. In other words, a mutual fund is a collection of money pooled from a diverse group of individuals. The funds are professionally managed by fund managers who allocate the fund in stocks, bonds, and many other such assets. After subtraction of appropriate fees and taxes, the participants get income and profits depending on their contribution towards the corpus.  

Benefits of Mutual Funds

  • As compared to other investment options, mutual funds are far more flexible. Investors can enter and exit a mutual fund any time. 
  • Mutual funds are professionally administered by experienced professionals, called fund managers, who work tirelessly to optimize investment growth possibilities by changing allocations of funds according to the fluctuations in the market.
  • Mutual funds give you the opportunity to diversify your investment portfolio across stocks, debt, market size, sectors and industries.  
  • Investing in mutual funds is not very expensive. Mutual fund houses charge 0.50% to 1.50% in exchange for expert management, exposure to varied financial instruments, etc.
  • Other than ELSS investments, you can redeem your assets at any moment without a lock-in period. ELSS investment is subject to a 3-year lock-in period.  
  • Systematic investment plans allow you to invest with a little amount and create a sense of confidence. 
  • Since most mutual fund investments have no lock-in period and are open-ended, they offer high liquidity. 

NRIs and OCIs can download the SBNRI app to choose from 3000+ mutual fund schemes and invest in mutual funds from the country of their residence. Here are a few simple steps:

NPS vs Mutual Fund: Which One You Should Choose

Here is a comparison between NPS and mutual funds that will help you select the most suitable option for you.

  • Allocation of fund: Equity mutual funds invest mainly in equity stocks of companies. NPS, on the other hand, has low equity exposure. Hence, mutual funds tend to offer higher returns than NPS.
  • Risk: Due to government backing, NPS are less risky. Whereas, due to greater exposure to equity, investment in mutual funds is riskier. However, it depends on the amount of risk an investor is willing to take based on his/ her risk appetite and investment goals. 
  • Investment cost: When it comes to fund management cost, NPS is the cheapest investment with around 0.1% management cost. Mutual fund houses charge investors 0.50% to 1.50% fee, which is much higher than the NPS management fee.
  • Liquidity: There are withdrawal restrictions on the Tier I NPS investment. You can’t withdraw your whole investment before 10 years from first investment or before you turn 60. However, you can claim up to 25% in part provided you meet the requirements. In mutual funds, you can redeem your assets at any moment without a lock-in period. However, all ELSS funds have a 3-year lock-in period.
  • Taxation: Investing in mutual funds as well as NPS provides tax benefits. However, investing in NPS has more benefits than in equities mutual funds. You can get a standard deduction of Rs. 1.5 lakh on the investment amount under Section 80C of the Income Tax Act 1961. Under Section 80CCD of the IT Act, you can get a maximum deduction of Rs. 50,000 each fiscal year. Investment in certain mutual funds, such as ELSS, offer tax exemption on investments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. 

Both NPS and mutual funds help you accumulate wealth over a period of time and inculcate financial discipline in your life. Mutual funds can be used as emergency savings because of the flexibility they provide. Investors can withdraw the funds as per their requirements. NPS, on the other hand, are not that flexible. NPS is most suitable for individuals who are approaching their retirement age. NPS involves lower risk and offers tax advantages.

National Pension Scheme and mutual funds have many common features and differences. Individuals can choose between them based on their financial goals and risk appetite. If you are investing to ensure a happy retirement without taking much financial risk, NPS must be your option. Mutual funds are suitable for investors who have a high-risk tolerance, short-term financial goals and are looking for flexible investment options.

NRIs willing to invest in NPS or mutual funds in India must consult market experts to make informed decisions. You can get detailed mutual fund advisory from experts at SBNRI. You can download SBNRI App from the Google Play Store or App Store to ask any questions related to mutual fund investment, NRI account opening online and tax filing in India. To ask any questions related to Mutual Funds, click on the button below. Also visit our blog and YouTube channel for more details. 

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