NPS v/s Mutual Funds: Which is Better and Why?

Proper and punctual investment is the key to proper financial management and maintaining a disciplined financial portfolio to achieve various financial goals. The importance of investments can never be looked down upon, especially after the trying times that we have experienced since the worldwide pandemic outbreak. 

The two of the most popular investment schemes in the present age are mutual funds and NPS. The purpose of this article is to highlight the pros and cons of both these schemes and make a comparative study to determine which one is better suitable. 

What is NPS?

The full form of NPS is National Pension Scheme. This is a national investment system launched by the Indian government back in 2004 and has been made available to all sorts of working professionals in the country by 2009. Any legal Indian working professional aged between 18 and 60 years is eligible for applying to this scheme. 

NPS is a long-term investment strategy for securing your future after retirement. NPS investment ensures a disciplined contribution to a dedicated pension account regularly and after retirement a section of the total accumulation can be withdrawn to buy annuities, further securing your post-retirement income. 

Advantages of NPS

Some of the major benefits of NPS are

  1. NPS is subjected to EET, implying tax-free contributions, and only during withdrawal, does the accumulation get taxed. Moreover, if the accumulation is used for purchasing annuities, it remains tax-free. 
  2. Once the mandatory Tier I account is opened, the voluntary Tier II account requires a minimum contribution of INR 1000, which can be entirely withdrawn.
  3. Plausible long-term investment option, securing long-term goals
  4. NPS withdrawal on maturity has gone tax-free up to 40% of the entire accumulated amount after 2016
  5. NPS investors enjoy tax benefits up to INR 1.5 lakh, with an additional benefit of INR 50000

NPS calculator

The NPS calculator is an online digital tool for illustrating the tentative lump sum amount and pension as expected by an NPS subscriber on maturity. It depends on several factors like the amount of regular monthly contributions, corpus percentage reinvested for annuity purchase, and estimated rates in respect of investment returns and concerned annuity chosen. 

You need to enter your birth date, your monthly contribution, total contributing years, expected investment return, percentage of annuity purchase, and expected rate of annuity on the NPS calculator, to know the results. 

What are mutual funds?

Mutual funds are formed by pooling a large amount of money from several investors with a common investment objective. This money is eventually invested in equities, bonds, shares, and every investor holds units, representing their individual holding. The profit gets automatically distributed among all the investors, depending on the current market condition. 

Mutual fund investments can be broadly classified into two categories- lump sum and SIP. As the name suggests, lump sum investments are single-time investments. You will receive returns depending on the market conditions. SIPs are like recurring deposits, implying you make consistent regular deposits of a fixed sum for a certain period. This is a comparatively safer mode of investment, considering the benefit of rupee cost averaging. 

There are three types of mutual funds:

  1. Equity funds, ensure better returns, especially in the long-run
  2. Debt mutual fund investments run a lesser risk when compared to equity funds. Moreover, they offer a fixed rate of maturity, enhancing the sense of security and deducing potential risk factors.
  3. Hybrid or balanced mutual funds, let you enjoy the benefits of both debt and equity mutual funds.

Advantages of mutual funds

Some of the major advantages of mutual funds are:

  1. Except for ELSS funds, no mutual funds provide any lock-in period, allowing the investor for easy withdrawal at any point
  2. SIP offers a secured investment option
  3. Most of the mutual funds are open-ended, offering high liquidity
  4. Mutual funds are comparatively more flexible, allowing easy entry and exit at any point
  5. They offer various plans for investment depending on term-based financial goals
  6. ELSS allows tax benefits for investments up to INR 1.5 lakhs, as per the provisions u/s 80C of the IT Act

Mutual fund calculator

A mutual fund calculator is an online digital tool which reveals your estimated return from mutual fund investment. As you enter the relevant details like your investment amount, duration, expected return rate, etc., the mutual fund calculator works automatically to reveal the result. Based on these, you can make better financial planning and portfolio.

A comparative study of NPS and mutual funds

INVESTMENT AMOUNT Minimum INR 6000 Minimum INR 100
RISK Comparatively lower risk Comparatively higher risk
LOCK-IN PERIOD Till retirement age No lock-in period, except for ELSS
PRE-TERM WITHDRAWAL Only 20% of the total amount accumulated is allowed for pre-term withdrawal Depending on requirements, it can be redeemed anytime
TAX BENEFITS Available up to INR 1.5 lakhs, with an additional benefit of up to INR 50000 ELSS allows tax exemption for investments up to INR 1.5 lakhs


From the above discussion, it is evident that both NPS and mutual funds are great ways for investment, each offering their individual pros and cons. Utilising the mutual fund calculator and NPS calculator you can make a better assessment, thus aiding your decision. 

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