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NPS vs Mutual Funds- Which is Better?

NPS vs Mutual Funds- Which is Better?
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Retirement planning demands a thoughtful strategy. Historically, investing has been a prudent way to instill financial discipline and security for a secure retirement. Over time, increasing numbers of investors have recognized the importance of saving and investing due to market volatility and job instability. Especially in today’s challenging environment. However, choosing the right savings method has become a complex task due to the plethora of investment options available. This brings us to the ongoing debate of NPS vs Mutual fund.

In this article, we will compare two currently debated investment options: NPS vs Mutual funds. While both are market-linked and offer similar advantages, they also have significant differences and unique advantages. We will analyze each plan and determine which one aligns better with an investor’s financial objectives and suitability.

What is the National Pension Scheme (NPS) ?

The National Pension Scheme (NPS) is a government-conceptualized social security scheme available to all Indian citizens, excluding armed forces personnel, working in public or private sectors, or the unorganized sector.

NPS is often compared to a Systematic Investment Plan (SIP) or Recurring Deposit (RD). With NPS, you invest a fixed amount each month until you meet your investment goals or reach retirement age. Upon retirement, you can withdraw a portion of the corpus, while the rest remains under the management of a PFRDA-registered pension fund manager. The Pension Fund Regulatory and Development Authority (PFRDA) oversees and regulates NPS nationwide.

Previously, NPS was exclusively available to central government employees, but it has now been expanded to include all employed Indian citizens, except those in the military services.

What are Mutual Funds?

Mutual funds offer flexibility to investors who seek diversification and growth in the economy.

Asset Management Companies (AMCs) manage and operate mutual fund schemes, providing two options to investors: open-ended and close-ended schemes.

Open-ended schemes offer easy entry and exit, favored for liquidity and diversification. Close-ended schemes lock in your investment until maturity, granting mutual fund managers greater control over the funds.

Additionally, investors can choose from equity, debt, or commodity-focused mutual funds. Equity mutual funds invest in high-quality stocks listed on stock exchanges like NSE and BSE. Debt mutual funds allocate funds to quality corporate bonds, sovereign papers, and money market instruments. Commodity-focused mutual funds invest in commodities such as gold and silver.

Why Invest in NPS?

Investing in the NPS is a prudent choice for those seeking early retirement planning and favoring a low-risk approach. It offers the advantage of a stable pension income during your retirement years, particularly beneficial for individuals transitioning from private-sector employment. You can calculate your NPS returns with the smallcase NPS calculator, online. 

Adopting this systematic investment approach can significantly enhance your post-retirement life quality. Moreover, salaried individuals aiming to optimize their Section 80C deductions should consider this plan.

NPS enjoys popularity among private sector employees due to the absence of traditional retirement benefits in many private companies. Furthermore, the NPS account’s portability between professions enhances its overall appeal. Additionally, NPS accounts offer tax benefits in accordance with Sections 80C and 80CCD of the Income Tax Act.

Why Invest in Mutual Funds?

Investing in mutual funds offers a versatile and efficient way to grow your wealth while minimizing risk. One of the primary benefits of mutual funds is diversification. When you invest, your money is combined with that of other investors, allowing a skilled fund manager to create a diversified portfolio of assets, such as stocks and bonds. This diversification helps spread risk, potentially leading to more stable returns compared to individual investments.

Professional management is another significant advantage. Expert fund managers make informed investment decisions based on extensive market knowledge and research, aiming to optimize fund performance. This professional approach can be particularly valuable in navigating complex financial markets.

Mutual funds provide accessibility and affordability, welcoming investors of all budgets. You can begin investing with a modest amount, making it accessible to a broad range of individuals. Additionally, mutual funds offer liquidity, allowing you to buy or sell units when needed, providing flexibility in managing your investments.

Whether your goal is long-term wealth accumulation, regular income, or tax benefits, various types of mutual funds are available to cater to different financial objectives and risk tolerances. Overall, mutual funds present an attractive and versatile option for building and managing a diversified investment portfolio effectively.

NPS vs Mutual Funds: Difference Between NPS vs Mutual funds

The following are the differences between NPS vs Mutual funds. 

Aspects of DifferencesMutual FundsNPS 
Risk ManagementInvestors can influence risks. ELSS entails higher equity exposure and associated risk. Risk tolerance varies based on individual circumstances.Limited control over risk management. Lower equity allocation reduces risk but may affect returns.
Tax BenefitsBoth offer tax advantages. NPS allows higher deductions.NPS offers substantial deductions.
Equity AllocationELSS focused on equities for potential high returns.NPS has lower equity allocation.
Management CostsMutual funds have varying expense ratios.NPS has a cost-effective 0.1% fee.
Withdrawal FlexibilityMutual funds are flexible; NPS has lock-in till retirement.NPS has limited flexibility; mutual funds offer easier access.
Investment ReturnsMutual funds may offer higher returns, especially in bullish markets.NPS historically provides returns between 8%-10%.
LiquidityMutual funds offer easier access to funds.NPS has limited liquidity; full withdrawals at retirement.
Lock-in PeriodELSS: 3 years; mutual funds have shorter lock-in.NPS: longer term (partial withdrawals available after 10 years or at 60).

Understanding the differences between mutual funds and NPS and also NPS vs ELSS is essential for aligning your investments with your financial goals and risk tolerance. Both options have merits, and the choice depends on your individual circumstances and objectives.

Advantages of Investing in NPS

When considering your investment options, the National Pension Scheme (NPS) offers a host of benefits that can significantly enhance your financial future. Here are the key advantages:

  • Expert Fund Management: Your savings are professionally managed by experienced NPS fund managers regulated by the PFRDA (Pension Fund Regulatory and Development Authority).
  • Higher Returns Over Time: Investments in NPS Tier 2 accounts have the potential for substantial long-term growth, especially with a notable allocation to equity investments.
  • Accessible with Low Investments: Start your NPS journey with a modest initial deposit of just Rs. 500 for Tier 1 and Rs. 1,000 for Tier 2 accounts. You can make contributions conveniently via various methods.
  • Simplified Documentation: Entry into the NPS is straightforward, whether through the NPS CRA login or by completing minimal paperwork and providing identity and address proof.
  • Inclusivity: NPS is open to all Indian citizens, including NRIs, and caters to a wide age range, from 18 to 60 years, making it versatile and accessible.
  • Regulatory Safeguards: Robust regulations ensure the security of your investments, providing peace of mind along with competitive returns.
  • Tax Efficiency: Benefit from tax exemptions under sections 80CCD (1B) and 80C, offering valuable deductions for both salaried and self-employed individuals.
  • Flexibility and Diversification: Enjoy flexibility in managing your investments, including the option to open multiple accounts, choose asset classes, and switch fund managers as per your evolving financial goals and preferences.

Incorporating NPS into your investment portfolio can be a strategic move, offering both financial security and potential growth. Make informed choices and secure your financial future with NPS.

Advantages of Investing in Mutual Funds

Mutual funds offer a plethora of benefits that can significantly elevate your investment experience. Here are the key advantages:

  • Liquidity on Demand: Mutual funds provide unparalleled liquidity, allowing investors to redeem units at any time. Unlike fixed deposits, they offer flexible withdrawal options, though pre-exit penalties and exit loads may apply.
  • Built-in Diversification: Mutual funds spread investments across a variety of securities, reducing the impact of fluctuations in any one asset. This built-in diversification helps stabilize your portfolio.
  • Professional Fund Management: Skilled fund managers oversee mutual funds, making expert investment decisions on your behalf. They monitor market trends, entry, and exit points, ensuring your investments are well-managed.
  • Invest with Any Budget: Mutual funds accommodate investors with various budgets. You can start small, with investments as low as Rs. 500, making it accessible to individuals from all income brackets.
  • Ease of Access: Mutual funds are readily accessible through various channels, including brokerage firms, registrars, online platforms, agents, and banks. There’s no need for a Demat Account, making investing hassle-free.
  • Tailored to Goals: Mutual funds offer schemes for every financial goal, whether it’s saving for the short term or building wealth for the long term. You can choose funds based on your risk tolerance and objectives.
  • Safety and Transparency: SEBI guidelines have brought transparency to the mutual fund industry. Color-coding indicates the risk level of each scheme, ensuring informed decision-making. You can also verify fund manager credentials.
  • Short Lock-in Period: Tax-saving mutual funds have a lock-in period of just 3 years, shorter than most other tax-saving instruments. Plus, you can choose to stay invested even after the lock-in period ends.
  • Lower Tax on Gains: ELSS funds provide tax savings up to Rs. 1.5 lakh annually under section 80C. Other types of mutual funds are taxed based on the fund type and investment duration.

Understanding these advantages of mutual funds empowers investors to make informed decisions, potentially leading to significant gains in the future.

Mutual Fund vs NPS: Which is Better?

Retirement planning is an indispensable aspect of managing personal finances, and with the myriad of investment options available today, it’s easy to feel overwhelmed. One notable contender in this landscape is the National Pension Scheme (NPS), overseen by the Pension Fund Regulatory and Development Authority (PFRDA) in India. Some even liken it to a retirement-oriented mutual fund.

When weighing the pros and cons of NPS and mutual funds, you’re essentially navigating a spectrum of financial opportunities to grow your wealth smartly. The choice between the two hinges largely on your specific financial objectives and your comfort level with risk. If you’re open to taking on a bit more risk in exchange for potentially higher returns, mutual funds are an excellent choice. On the other hand, if your priority is consistent growth without substantial capital appreciation, NPS emerges as the preferred option.

In essence, there is no one-size-fits-all answer to the NPS vs mfs dilemma. Your decision should align with your unique financial goals, risk appetite, and vision for securing a financially sound retirement. So, let us not ask ‘Which is better NPS or Mutual Funds’, instead, let us start asking ‘Which is better for me?’

Strategies for Investors Choosing Between NPS vs Mutual Funds

When contemplating investment alternatives, both NPS and Mutual Funds instill financial discipline by automatically deducting funds from your registered account at specified intervals. However, they differ significantly in terms of flexibility and purpose.

  • Mutual Funds as Emergency Savings: Mutual funds offer flexibility and are commonly utilized as emergency savings. You have the freedom to withdraw funds as needed, making them a versatile choice. On the other hand, NPS lacks such flexibility. It’s more suitable for individuals at the retirement stage, seeking tax advantages and prioritizing low-risk investments.
  • Tax Benefits of NPS: NPS offers substantial tax benefits during your employment years. Contributions made by you and your employer to NPS are eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80CCD of the Income Tax Act. Additionally, any self-contributions (up to Rs. 50,000) can be claimed as an NPS tax benefit under Section 80CCD. Moreover, NPS was classified as an Exempt-Exempt-Exempt (EEE) investment in the 2019 budget. This means that NPS subscribers can enjoy tax deductions on NPS contributions, tax-free returns on NPS contributions, and tax advantages on lump-sum withdrawals. In contrast, mutual fund capital gains are subject to taxation, both in the short and long term.

In essence, your choice between NPS and Mutual Funds should align with your specific financial objectives. If securing your financial future and availing of tax benefits are your primary goals, NPS is a compelling choice. Mutual funds, on the other hand, are often favored by those with a higher risk tolerance, short-term financial goals, and diverse investment purposes.

To Wrap It Up…

In conclusion, the choice between Fixed Deposits (FDs) and Mutual Funds hinges on your financial goals, risk tolerance, and investment horizon. FDs are a secure option for risk-averse investors, offering guaranteed returns but lower potential growth. On the other hand, Mutual Funds provide the opportunity for higher returns, albeit with higher risk, making them attractive to those with a longer investment horizon and a willingness to navigate market fluctuations.

Each investment avenue has its merits. FDs offer stability and security, making them suitable for short-term goals and individuals who prioritize capital preservation. Mutual Funds, on the other hand, are a versatile tool for wealth creation, diversification, and potentially maximizing returns over the long term. By carefully assessing your goals and considering the pros and cons of each option, you can make an informed decision to secure your financial future.


1. Is NPS and mutual fund the same?

No. The National Pension Scheme (NPS) is a government-conceptualized social security scheme available to all Indian citizens, excluding armed forces personnel, working in public or private sectors, or the unorganized sector. Mutual funds offer flexibility to investors who seek diversification and growth in the economy.

2. Which is better NPS Tier 2 or mutual fund?

NPS Tier 2 boasts a cost advantage over mutual funds, with an expense ratio capped at 0.09%. In comparison, ‘direct’ mutual funds have expense ratios ranging from 0.3% to 1%, while ‘regular’ mutual funds can go even higher, ranging from 0.6% to 2.3%.

3. How many Mutual Fund and NPS investments can an investor make?

A mutual fund investor can choose from a variety of funds for investment. However, this differs from NPS, where the subscriber must remain committed to a single fund.

4. Who regulates NPS and Mutual Funds?

No, the Securities and Exchange Board of India (SEBI) regulates and oversees all mutual funds, while the Pension Fund Regulatory and Development Authority of India (PFRDA) regulates NPS.

5. Is NPS better than Mutual Funds?

Both investment options provide tax benefits, but NPS offers greater tax advantages compared to equity mutual funds. While equity mutual funds may incur a 10% exit tax on long-term returns, NPS allows for a larger tax deduction of up to Rs 2 lakh under Sec 80C, as opposed to Rs 1.5 lakh for ELSS plans.