Investing your money has always been a good way of achieving both financial stability and discipline. With frequent fluctuations in the market and uncertainty of employment, especially during the challenging times we are facing, a lot of us have realised the importance of savings and investments. The saving part is usually easy but when it comes to investments the diversity of options available may seem overwhelming!
For the purpose of this article, we are going to focus on two such investment options— NPS vs Mutual fund. Although both these schemes are market-linked and have a number of similar benefits, there are some significant differences between the two and also specific individual advantages.
We will go through each of these schemes individually as it is important to understand them before deciding which one to choose.
The National Pension System or NPS is an investment system launched by the government of India in 2004 and was made available to all sections of working professionals by the year 2009. Any Indian working professional from the age of 18-60 years can apply to this scheme.
NPS is your long-term investment option and a great way to secure your post-retirement life. By investing in NPS, you get to contribute to a pension account on a regular basis, and on retirement, you can withdraw a part of accumulation while using the other part for buying annuities which helps secure your post-retirement income.
For example:
Mr. Sharma has been investing in NPS for the past 10 years at a contribution of Rs. 1,00,000/year with a rate of interest of 9% p.a. (the interest rates vary from 9% to 12% p.a.) Now after his retirement, he decided to withdraw a part of the corpus in a lump sum.
| Investment amount | Total term period | Interest Rate | Total amount |
| 1,00,000 | 10 years | 9% | 1,90,000 |
Although according to the terms of NPS, he can only withdraw 60% of his wealth i.e., 1,14,000 while the 40% i.e., 76,000 must be spent to buy annuities.
Use NPS Return Calculator for better understanding
Mutual funds are formed by money pooled by a large number of investors having common investment objectives. This money is invested in bonds, equities, market shares, and each investor owns units representing portions of the holdings. The gains through these funds are proportionately distributed among all the investors.
There are basically two modes of investments in mutual funds— SIP and Lump sum. SIP (Systematic Investment Plan) is a relatively more preferred and safer mode of investment that allows you to invest in your corpus at fixed intervals; as compared to the lump sum mode which requires you to pool in the corpus in one go. When you invest through SIP, you don’t need to monitor the market trends given rupee cost averaging and are at a much lesser risk of loss.
For example-
Raj invested in mutual funds through SIP, while Reena invested through Lump sum. While both of them were enjoying the benefits of their respective plans, Raj was much more relaxed as he didn’t have to keep up with the market trends while Reena was often stressed about the ‘right time’ to invest.
Now that we have covered the individual aspects of both NPS and Mutual funds, it’s time to make the right choice and choose the investment that’s more suitable to you. To make this a little easier let’s compare both of the above considering few important parameters—
| Parameters | NPS | Mutual Funds |
| Investing amount | Minimum 6000 | Minimum 100 |
| Risk | Lesser risk | Higher risk |
| Lock in period | Till retirement | No lock in period for funds other than ELSS funds |
| Flexibility | Low | High |
| Pre withdrawal | Only 20% of total amount can be withdrawn | Can be redeemed anytime |
| Tax benefit | Upto 1.5 lakhs with additional benefits of 50,000 rupees | ELSS exempts tax to investments upto 1.5 lakhs |
After studying both the investment systems and learning about their differences, you may find that each of them has its own benefits as well as risks. While NPS is great for long-term investments and a much safer option, mutual funds help in achieving your short-term goals and are more liquid and flexible in terms of withdrawal.
Both NPS and mutual funds are great options, the key to choosing the right one is setting your goals and analyzing which plan suits your requirements and financial goals. If what you are looking for is your retirement plan and securing your post-retirement life, NPS is the way to go. However, if you are willing to take some risks and have short-term goals like having your own home, buying yourself a luxurious car someday then investing beta in mutual funds will be a much better option.
NPS ensures stability and security of investment, whereas, mutual funds ensure growth of capital investment.
Both NPS and equity mutual fund are eligible for deductions under Section 80C.
Yes, indeed. The funds can be switched from category to category, namely, equity, corporate bonds and government bonds.
The number of funds that an investor can invest into for mutual funds are multiple. This is not the case for NPS as the subscriber has to stick to only one fund till the end.
No. All mutual funds are regulated and monitored by the SEBI (Securities and Exchange Board of India), whereas, NPS is regulated by PFRDA (Pension FUnd Regulatory Development Authority of India).
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