NPS Vs Mutual Funds: A Comparative Analysis

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Retirement planning requires a well-thought-out strategy, aiming to establish financial discipline and security for a stable post-retirement life through investments. With time, numerous investors have recognised the significance of saving and investing, driven by market volatility and employment uncertainties, particularly in challenging periods. However, amidst the plethora of investment choices available today, selecting the right savings approach has become a complex task. This article focuses on NPS Vs mutual fund comparison.

Defining NPS

The National Pension Scheme, commonly known as NPS, was introduced by the government in 2004, initially being restricted to government employees. However, in 2009, its availability expanded to encompass employees from non-public sectors as well. NPS enables individuals to participate in the scheme during their employment period, granting the option to withdraw up to 40% of the accumulated fund upon retirement. Subsequently, 60% of the remaining corpus is directed towards reinvestment in an annuity, while the remainder can be disbursed on a monthly basis.

Key Characteristics of NPS

Flexible Investment Approach

A notable advantage of the National Pension Scheme lies in the freedom to invest at one’s discretion, providing the flexibility to choose investment times according to personal convenience. The scheme does not mandate regular or periodic investments.

Low Exposure to Risk

NPS investments exhibit limited exposure to equity, with a maximum permissible allocation of 75% toward equity shares or stocks. Consequently, the scheme is less susceptible to sharp fluctuations in the market. However, this cautious approach also constrains the potential for substantial profit generation and capital appreciation.

Investment Options

Active choice investment and auto choice investment are the two main types of investment possibilities that NPS in India provides to potential investors. One can choose to invest in the securities of one’s choice under the first option. It gives one the freedom to make a decision based on one’s objectives for wealth appreciation and risk tolerance.

In auto choice investment, based on the investor’s age bracket, the scheme manager selects the securities to invest in on one’s behalf. The risk level in one’s portfolio would then be inversely correlated with one’s age.

Returns on Investments

The earning potential of NPS in India is constrained because of their limited exposure to stocks or equity shares. NPS funds typically produce yearly returns in the region of 8% to 10%. It gives better yields than other fixed-income assets though. The online NPS calculator provided by Groww can be used to determine one’s NPS returns.

Equity Component

Only 75% of NPS assets may be used to buy equity funds, as was previously specified. When one becomes 50, this percentage is further lowered by 2.5% every year.

Premature Withdrawal

There are stringent regulations on withdrawal that must be followed prior to the scheme’s maturity or one’s retirement. Depending on the reason for one’s withdrawal, such as family’s medical expenses, child’s schooling or marriage, purchase or construction of home, etc., one can only withdraw 25% of the corpus. Such withdrawals are only permitted three times over the program’s duration, with a minimum time interval of five years between each withdrawal.

Defining Mutual Funds

A mutual fund is an investment vehicle that is expertly managed. It gathers or pools investments from several investors. It makes the best use of the acquired corpus to invest in order to optimise returns and meet investment goals. 

  • The funds are distributed among various industries, sectors, stocks, and debt instruments because the fund is handled by a professional. 
  • One can easily invest in mutual funds with a lump sum payment or a recurring SIP. 
  • While using mutual funds, one must always check to see if the fund’s investing aim aligns with one’s personal investment objectives. 
  • Second, make sure that additional criteria like liquidity, investment horizon, stock and debt exposure are met.

Features of Mutual Funds (SIP)

  • With just ₹500, one can begin investing in mutual funds (through SIPs). 
  • To avoid the stress of pooling large sums of money at once, investors can choose to invest in mutual funds at pre-defined periods on a weekly, monthly, quarterly, or annual basis. 
  • Mutual fund SIP instalments must be paid at regular intervals, which instils in investors a sense of accountability and dependability. 
  • Investors also have the flexibility to decide whether to raise or remove their principal investment depending on their income.
  • For example, the SIP feature known as top-up enables investors to increase their SIP amount by a fixed amount at predetermined intervals while also boosting their earnings.

Comparing NPS and Mutual Funds

Below is the difference between NPS and mutual funds based on various parameters. By contrasting aspects like NPS Vs mutual funds returns, one can make the best decision for using the following criteria or metrics.

Allocation of Equity and Exposure

While NPS has a reduced allocation of assets to equity-oriented mutual funds, ELSS invests largely in these funds. ELSS therefore has a greater potential to produce greater returns than NPS.

Tax Advantage

  • If one invests in NPS, one may be eligible for a bigger tax deduction under Section 80C of up to ₹2 lakh as opposed to ₹1.5 lakh for ELSS schemes. 
  • The benefit of NPS is that one can withdraw up to 60% of the entire corpus in a single lump sum. The balance is to be put into an annuity that will provide one with a steady income for the rest of one’s life. 
  • Notwithstanding the fact that the income one gets from the annuity is subject to tax at the relevant slab rate, this amount is free from taxation.
  • Both investment alternatives come with tax advantages. When compared to stock mutual funds, whose long term gains are subject to a 10% withdrawal tax, NPS offers better tax advantages.

Lock-In Time

NPS has a lock-in till retirement, which is substantially longer than the 3-year lock-in term for ELSS, a tax-saving mutual fund. Before reaching 60 years of age or finishing at least ten years, one cannot withdraw the full investment. Nonetheless, there is a 25% maximum withdrawal percentage (of the subscriber’s total contributions) that one can use for very particular reasons.

Hazard Exposure

Investment risk is considerable for ELSS because of its higher exposure to equity-oriented mutual funds. The amount of risk an investor is willing to take, nevertheless, will depend on his personal standard of living and income. A fund manager who is in charge of active management of the funds is in charge of the funds. Also, a fund manager secures and pursues a higher return for the mutual fund

Fund Management Fees

NPS is the least expensive managed fund one can purchase for retirement, with a management fee of just 0.1%. The expense ratio charged by asset management firms, which ranges from 0.50% to 1.50%, is significantly more than the cost of managing NPS.

Comparison at a Glance 

Let’s summarise the differences between the two investment instruments in a table.

ParametersNPSMutual Funds
Investing amountMinimum ₹6,000Minimum ₹100
RiskLower riskSlightly riskier than NPS
Lock-In periodUntil retirementNo lock-in period except for ELSS
Premature WithdrawalOnly 20% of total amount can be withdrawnCan be redeemed anytime
Tax BenefitsUp to ₹1.5 lakhs with additional benefits of ₹50,000ELSS exempts tax on investments up to ₹1.5 lakhs


NPS presents an attractive option for those aiming to amass a substantial retirement fund with favourable returns from both Tier I and Tier II accounts. On the other hand, mutual funds are fitting for individuals seeking diversified investment portfolios that span a prolonged time frame. Mutual funds serve as a prudent selection for investors desiring to spread their holdings across various securities, mitigating portfolio risk. Commencing mutual fund SIP investments requires as little as ₹500, allowing investors to opt for diverse mutual funds such as equity, debt, hybrid, gold, and index funds based on their risk tolerance. Equity mutual funds, despite some calculated risks, hold the potential to outperform NPS over an extended period.

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