Is NPS a better retirement investment strategy than Mutual Funds?

Nps vs sip in mutual funds

National Pension Scheme (NPS) is an investment scheme aiming for retirement benefits. But nowadays, people get confused while choosing a retirement plan. There are many mutual funds available in the Indian financial market right now. So, it is better to get a comparison for a better understanding of both. After that, you can decide which one is best for you.

What is NPS?

  • NPS is a National Pension Scheme based on only retirement plans. The government of India provides a backup for this savings scheme.
  • Any self-employed or employed professional can open an NPS account. There are some tax benefits one gets after having an NPS account.
  • NPS is a low to moderate risk investment option. It aims for optimum monetary benefit with minimum risk.

What are mutual funds?

Mutual funds are some investor-operated investment funds. The fund is for investing in buying company stocks and shares. And a professional fund manager manages the investment for a higher amount of return. And a mutual fund has a share of several investors.

A comparison to understand better: NPS or Mutual Funds

A brief comparison will help you to understand better which one is for you. Some essential factors will direct to the conclusion for choosing the best retirement plan.

Tax benefits

NPS has some tax exemption benefits. You can enjoy tax benefits under the section of 80CCD (1B). There is an extra deduction for investment up to fifty thousand in NPS Tier I account for this exclusive tax benefit. This additional deduction is over Rs.1.5 lakh, which is already in the section 80C of the Income Tax Act, 1961. Moreover, a person with an NPS account can avail tax deduction of 10% of gross income. It is under section 80 CCD (1) that is including Rs.1.5 lakh, which comes under Section 80 CCE.

Mutual funds do not offer such a huge tax deduction benefit like NPS. All equity mutual funds do not have such a facility for tax exemption. Equity-linked saving scheme or ELSS has a tax deduction benefit. It comes under section 80C of the Income Tax Act, 1961. So, an investor can get a tax deduction up to Rs. 1.5 lakh.

Liquidity factor

NPS does not offer liquidity of investment at a larger extension. You can withdraw a premature amount after ten years of investment. And for partial withdrawal, it is possible after three years. Partial withdrawal is 25% of the contribution. There are lots of terms and conditions for getting the permission of partial withdrawal. You can apply for money for purposes like house building, child’s education, or marriage.

Apart from the close-ended mutual funds, almost all mutual funds have the facility of liquidity. And there is no rigid restriction excluding the three years lock-in period in ELSS. So, you can manage your investment as per the market condition, risk, and other things.

After retirement income

The NPS scheme provides a full-proof retirement plan. The returns might not be very high, but it is the safest retirement plan in India. The inflation might affect the pension amount as NPS is related to market conditions. There is no tax exemption on the interest earned.

Mutual funds work in a different way than NPS. So, all mutual funds will not offer equal safety like NPS. But they might give you a higher return.

Final take

If you want to choose mutual funds as a retirement plan, you can select ELSS. Go for some hybrid mutual funds that customize retirement benefits. These generally come under section 80C for tax benefits. But always check with the asset allocation facility before investing in any. But if you want to lower risks for a lump sum amount as a retirement income, you can choose NPS. It has government security for added backup. But returns are higher in mutual funds.