NPS vs Mutual Funds: Which is the Better Retirement Investment?

When it comes to planning for retirement, choosing the right investment option is crucial. Two popular choices among investors are the National Pension System (NPS) and mutual funds.

Both offer market-linked returns and a range of benefits, but they have distinct differences that make them suitable for different individuals.

In this article, we will explore the features and advantages of both NPS and mutual funds to help you make an informed decision about your retirement investment.

National Pension System (NPS)

The National Pension System, introduced by the Indian government in 2004, is a long-term investment scheme aimed at providing financial security during retirement. It is available to all working professionals between the ages of 18 and 60.

Under the NPS, individuals contribute to a pension account on a regular basis and can withdraw a portion of their accumulated wealth on retirement. The remaining amount is used to purchase annuities, ensuring a steady post-retirement income.

One of the key advantages of NPS is its tax benefits. Contributions made to NPS are tax-exempt, and the accumulated wealth used for purchasing annuities is also tax-free.

Additionally, NPS investors can enjoy tax benefits of up to 1.5 lakh rupees, with an additional benefit of 50,000 rupees.

The flexibility of NPS is another attractive feature. While the Tier I account is mandatory, the Tier II account is voluntary, allowing investors to withdraw their funds completely if needed.

However, NPS does have some limitations. The lock-in period until retirement means that investors cannot access their funds easily.

Only 60% of the accumulated wealth can be withdrawn, with the remaining 40% used for purchasing annuities. This lack of liquidity may not suit those with short-term financial goals.

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Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors with similar investment objectives. The pooled funds are then invested in a diversified portfolio of assets, such as stocks, bonds, and market shares.

Investors own units in proportion to their investment, and the returns are distributed among all the investors.

Mutual funds offer two modes of investment: Systematic Investment Plan (SIP) and lump sum investment.

SIP is a popular and safer mode of investment in mutual funds. It allows investors to invest a fixed amount at regular intervals, reducing the risk associated with market fluctuations.

On the other hand, lump sum investment requires investors to contribute a large amount of money at once. The choice between SIP and lump sum depends on individual preferences and risk tolerance.

There are different types of mutual funds available to investors. Equity funds provide higher returns but come with higher risks.

Debt mutual funds, on the other hand, involve lower risk and have a fixed maturity rate, offering a sense of security. Balanced or hybrid mutual funds combine the benefits of both equity and debt funds, providing a balanced approach to investment.

One of the major advantages of mutual funds is their high liquidity. Unlike NPS, most mutual funds have no lock-in period, allowing investors to withdraw their funds at any time.

Mutual funds also offer flexibility, as investors can enter and exit funds as per their convenience. Additionally, certain types of mutual funds, such as Equity Linked Savings Scheme (ELSS), offer tax exemptions under Section 80C of the Income Tax Act.

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NPS vs Mutual Funds: Making the Right Choice

Choosing between NPS and mutual funds depends on your financial goals, risk tolerance, and time horizon. If you are looking for a long-term investment that provides stability and security during retirement, NPS is a suitable option.

The tax benefits and the guarantee of a post-retirement income make it an attractive choice for individuals focused on securing their future.

On the other hand, if you have short-term financial goals and are willing to take some risks, mutual funds can be a better option.

The high liquidity and flexibility of mutual funds allow you to access your funds when needed. Moreover, the variety of fund types allows you to tailor your investment strategy based on your goals and risk appetite.

To help you make a more informed decision, let’s compare NPS and mutual funds based on important parameters:

ParametersNPSMutual Funds
Investing amountMinimum 6000Minimum 100
RiskLesser riskHigher risk
Lock-in periodTill retirementNo lock-in period (except ELSS)
Pre-withdrawalLimitedCan be redeemed anytime
Tax benefitUpto 1.5 lakhs with additional benefits of 50,000 rupeesELSS exempts tax to investments up to 1.5 lakhs

It is important to carefully consider your financial goals, risk appetite, and time horizon before making a decision. Consulting with a financial advisor or conducting thorough research can help you choose the investment option that aligns with your objectives.

Frequently Asked Questions

Which investment benefit is NPS and Mutual Fund best known for?

NPS ensures stability and security of investment, whereas mutual funds ensure the growth of capital investment.

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Is NPS and Mutual Fund eligible for deduction under Section 80 C of the Income Tax Act?

Both NPS and equity mutual funds are eligible for deductions under Section 80C.

Can funds be switched among different categories in NPS?

Yes, funds can be switched from one category to another in NPS, including equity, corporate bonds, and government bonds.

What is the number of investments that an investor can partake in for mutual funds and NPS?

Investors can invest in multiple funds for mutual funds. However, for NPS, subscribers are limited to investing in a single fund.

Are mutual funds and NPS regulated by the same body?

No, all mutual funds are regulated and monitored by the Securities and Exchange Board of India (SEBI), while NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) of India.


In conclusion, both NPS and mutual funds offer unique advantages and cater to different investment goals. NPS is ideal for long-term retirement planning, providing stability and tax benefits.

Mutual funds, on the other hand, offer flexibility and liquidity, making them suitable for short-term goals and investors willing to take some risks.

Understanding your financial objectives and conducting thorough research will help you make an informed decision about your retirement investment.

Remember to consult with a financial advisor to ensure your investment aligns with your specific needs and risk tolerance.

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