Retirement is something most individuals plan for from very early ages. One of the most important aspects that needs to be kept in mind while planning the same is to invest in avenues that offer inflation-beating returns.
If that were to be one’s main consideration, then there are multiple options available – ranging from Employees’ Provident Fund to National Pension Scheme to Mutual Fund Systematic Investment Plans to debt instruments.
But there are two important options available that receive higher consideration by most investors and that is NPS and Equity Mutual Funds. Wish to know more about these? Read on!
National Pension Scheme or NPS is a government retirement scheme meant to develop a sizable corpus for retirement. Originally meant for only government employees, this scheme allows for investment by non-public sector employees too.
The main advantage of investing in these funds are –
Based on the allocation of assets to a specific fund, mutual funds are categorized as equity mutual funds, debt mutual funds and hybrid mutual funds.
Equity mutual fund, in specific, refers to those funds where more than 70% of the assets are invested in equity stocks of companies.
These are further classified as –
These funds can be invested either through the lump sum mode or the SIP mode – the latter is to be paid at fixed intervals.
The power of compounding is what makes mutual funds a very lucrative option for investors and the high returns delivered helps beat inflation efficiently.
Basis | NPS | Equity Mutual Fund |
Meaning | It is a government retirement scheme meant to develop a sizable corpus for retirement. | It is a financial instrument managed by professionals that generate returns over a long period of time by investing in to equity. |
Equity exposure | The equity exposure is merely 50-75%. | The equity exposure can go up to 100%. |
Historical performance of returns | Delivered approximately 8-10% returns on average annually. | Delivered 14-18% in the long term. |
Risk | Low risk as it is government-backed. | The risk depends on market fluctuations. |
Fund manager | Can change fund manager every financial year. | No such option exists once invested in a fund. |
Asset class | Investors allocate funds into 4 asset classes namely, Equity, Corporate Debt, Government Bonds and Annuity. | Investors allocate into equity predominantly. |
Lock in period | Usually till retirement. | No such lock in period for most equity funds. These funds are highly liquid. |
Types | There are two kinds of NPS accounts – Tier I and Tier II. | There are many types of equity funds – large cap funds, mid cap funds, small cap funds, multi cap funds and ELSS funds. |
Minimum contribution | Minimum is Rs. 1000. There is no maximum. | Minimum is Rs. 500. There is no maximum. |
Tax benefit | The entire amount is tax free i.e. EEE. | The entire amount is subject to either short term or long term capital gains tax. If it is for short term then it will be 15% and if it is for long term, then the tax rate will stand at 10%. |
Costs of the fund | Lowest cost managed fund. | The cost incurred is variable. |
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