NPS vs Mutual Funds

NPS is a long-term retirement-focused investment vehicle designed to provide a regular income stream after retirement while mutual funds serve various financial goals. Explore key differences in this blog.
4 mins read

NPS, or the National Pension System, stands as a dedicated long-term investment avenue crafted to cater to retirement needs, offering a reliable income source post-retirement. On the other hand, mutual funds encompass a diverse array of investment options tailored to meet varied financial objectives, ranging from wealth accumulation to retirement planning and tax optimisation, contingent upon the specific scheme's objectives. Delving into the nuances of NPS vs Mutual Funds illuminates the distinctions between these two investment avenues, aiding investors in making informed decisions aligned with their financial aspirations.

In general when planning investment two prominent avenues that often come to mind are the National Pension System (NPS) and mutual funds. Let us understand in detail - NPS vs Mutual Funds - highlighting their differences and tax implications to help you make informed investment choices.

What is the National Pension Scheme (NPS)?

The National Pension Scheme is a government-backed, long-term retirement savings scheme designed to provide financial security during one's post-retirement years. It encourages systematic savings and investment in a mix of equity and debt instruments. Here are the key points about NPS:

  1. Purpose: The NPS encourages individuals to invest in a pension account during their employment. After retirement, subscribers can withdraw a portion of the accumulated corpus as a lumpsum and receive the remaining amount as a monthly pension.
  2. Eligibility: Initially limited to Central Government employees, it is now open to all Indian citizens on a voluntary basis. Private-sector employees can benefit significantly from NPS, as it provides a portable retirement solution across jobs and locations.
  3. Tax benefits: NPS offers tax benefits under Section 80C and Section 80CCD. Contributions made to NPS are eligible for deductions, making it an attractive option for salaried individuals.
  4. Returns: NPS investments include equities (with no guaranteed returns) but historically have delivered 9% to 12% annualised returns over the past decade.
  5. Risk management: The equity exposure in NPS is capped (currently between 50% and 75%). As investors age, the equity portion gradually decreases, ensuring a balanced risk profile.

What is mutual fund?

A Mutual fund is a professionally managed investment scheme that pools money from multiple investors to invest in diversified assets like stocks, bonds, or a mix of both depending on the investment objective of the scheme. It offers investors a share in the fund's returns and risks.

Mutual funds provide diversification, professional management, and liquidity. They cater to various financial goals, whether short-term or long-term, making them suitable for a wide range of investors.

Differences between NPS and mutual funds

Deciding where to invest your money can be a complex task, especially when considering options like the National Pension System (NPS) vs mutual funds. While both provide opportunities for financial growth, they serve distinct purposes:

1. Objective:

  • NPS: Primarily designed for retirement planning, with restrictions on withdrawal.
  • Mutual fund: Offers flexibility for various financial goals, including wealth creation, regular side income or tax-saving (ELSS funds which come with 3 year lock-in period).

2. Investment options:

  • NPS: Invests in equity (E), corporate debt (C), government bonds (G) and alternate investment funds (A) as per the investor's choice.
  • Mutual fund: Provides numerous fund categories, including equity, debt, hybrid, and thematic funds, offering a broader range of investment choices.

3. Lock-in period:

  • NPS: Tier I NPS, the mandatory NPS account, has withdrawal limitations. Full withdrawal is only allowed after 10 years or at age 60, but partial withdrawals up to 25% are permitted under certain conditions. However, investment freedom is limited, with a maximum of 75% allowed in equities within NPS.
  • Mutual fund: Offers schemes with various lock-in periods, and many have no lock-in, providing liquidity when needed.

4. Regulation:

  • NPS: Regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
  • Mutual fund: Regulated by the Securities and Exchange Board of India (SEBI).

5. Risk profile:

  • NPS: Although NPS invests in market securities it is generally considered less risky as the allocation to equity decreases as the retirement age approaches.
  • Mutual fund: Risk levels vary based on the chosen funds, ranging from low to very high risk.

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Who should invest in the National Pension Scheme (NPS)?

The National Pension Scheme (NPS) is a versatile retirement savings option that caters to a diverse audience. Here is a succinct breakdown of who should consider investing in NPS:

  1. Salaried individuals: NPS is an excellent choice for salaried employees seeking a disciplined, long-term retirement plan. Its tax benefits, low fees, and potential returns make it attractive.
  2. Self-employed professionals: Freelancers, consultants, and entrepreneurs can benefit from NPS due to its flexibility. It allows voluntary contributions beyond mandatory ones.
  3. Young professionals: Starting early maximises the power of compounding. Young professionals can build a substantial retirement corpus by contributing consistently.
  4. Risk-averse investors: NPS offers a mix of equity and debt, allowing conservative investors to choose a suitable asset allocation.
  5. Long-term planners: Those committed to systematic savings and retirement planning should explore NPS.

Who should invest in mutual funds?

Mutual funds cater to a diverse range of investors at various stages of their investment journey. Instead of solely assessing the fund as a whole, it's essential to delve into its underlying components to determine its suitability for your investment objectives. These funds comprise a blend of assets such as stocks, bonds, and commodities. Prior to investing, conduct comprehensive research and grasp the risks linked to the underlying assets of the fund. Mutual funds cater to both novice and experienced investors, providing advantages of diversification. Seasoned investors can identify funds focusing on particular growth sectors.

Tax implications on NPS and mutual funds

Here are some details about the tax implications on NPS and mutual funds

  • NPS: At retirement, NPS offers tax-free benefits on 60% of the corpus, while the remaining 40% reinvested in an annuity is taxable based on the individual's tax slab. NPS provides tax exemption up to Rs. 1.5 lakh under Section 80CCE and an additional Rs. 50,000 under Section 80CCD.
  • Mutual fund: Offers tax benefits under Section 80C for ELSS (Equity-Linked Savings Schemes) and capital gains tax advantages based on the fund's holding period. Equity Mutual Funds held for over one year qualify for long-term capital gains (LTCG) tax at 10% on gains above Rs 1 lakh. Debt Mutual Funds have a tax advantage if held for more than three years, with indexation benefits.

Both NPS and ELSS qualify for tax benefits under Section 80C.

Mutual Fund vs NPS: Which is better?

When considering the advantages and drawbacks of NPS versus mutual funds, investors are presented with a spectrum of financial avenues to enhance their wealth intelligently. The decision between the two primarily hinges on individual financial objectives and risk tolerance levels. If investors are inclined towards assuming more risk for potentially higher returns, mutual funds serve as an attractive option. Conversely, for those prioritising consistent growth with minimal capital appreciation, NPS emerges as the more favorable choice.

In essence, there exists no universal solution to the NPS versus mutual funds dilemma. Rather, the decision should be tailored to align with individual financial goals, risk appetites, and aspirations for securing a financially stable retirement. Hence, it is imperative to shift the focus from the question of "Which is better, NPS or Mutual Funds?" to "Which option is better suited to my needs?"

Strategies for investors choosing between NPS vs Mutual Funds

When considering investment options, both NPS and Mutual Funds foster financial discipline by automating fund deductions from your designated account at set intervals. However, they diverge significantly in terms of flexibility and intended use.

  • Mutual Funds for Emergency Funds: Mutual funds provide flexibility and are commonly utilised for emergency savings, allowing withdrawals as needed, rendering them versatile. Conversely, NPS lacks such adaptability, catering more to individuals in the retirement phase, prioritising low-risk investments and tax advantages.
  • Tax Advantages of NPS: NPS offers substantial tax benefits during employment. Contributions by both the individual and employer are eligible for tax deductions of up to Rs. 1.5 lakh under Section 80CCD of the Income Tax Act. Additionally, self-contributions (up to Rs. 50,000) can be claimed as an NPS tax benefit under Section 80CCD. Moreover, NPS enjoys Exempt-Exempt-Exempt (EEE) status since the 2019 budget, entailing tax deductions on contributions, tax-free returns, and tax benefits on lump-sum withdrawals. In contrast, mutual fund capital gains are subject to taxation, both short and long term.

Ultimately, the choice between NPS and Mutual Funds should align with your specific financial objectives. NPS presents an appealing option for those prioritising financial security and tax benefits, while Mutual Funds are favored by individuals with higher risk tolerance, short-term goals, and diverse investment needs.


Choosing between NPS and Mutual Funds depends on your financial goals, risk tolerance, and investment horizon. NPS is a compelling option for retirement planning, offering exclusive tax benefits. On the other hand, Mutual Funds provide flexibility, a wider array of choices, and liquidity, making them versatile tools for various financial objectives. To make the right decision, consider consulting a financial advisor who can tailor an investment strategy to meet your specific needs. Ultimately, a diversified portfolio that combines both NPS and Mutual Funds might offer the best of both worlds, catering to both your long-term retirement goals and short-term financial aspirations.

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Frequently asked questions 

Are mutual funds and NPS regulated by the same body?

No, mutual funds and NPS are regulated by different entities in India. The Securities and Exchange Board of India (SEBI) regulates mutual funds, while the Pension Fund Regulatory and Development Authority (PFRDA) governs the National Pension System (NPS).

Is NPS deductible under 80C of the Income Tax Act 1961?

Contributions made towards the National Pension System (NPS) are eligible for tax benefits under Section 80CCD(1).

Which is better NPS or SIP?

NPS (National Pension System) and SIP (Systematic Investment Plan) serve different purposes. NPS is ideal for retirement planning with tax benefits and SIP is a way to invest regularly in mutual funds for wealth accumulation.

Is it risky to invest in NPS?

NPS has a mix of equity and debt, so there’s some risk. However, it is regulated and offers stable returns over the long term.

What happens to NPS after death?

After the subscriber’s demise, the accumulated NPS corpus is passed on to the nominee or legal heir.

Can I invest Rs. 50,000 in NPS at once?

Yes, you can contribute a lump sum of Rs. 50,000 to NPS. However, it will not qualify for additional tax benefits beyond the annual limit.

How much will I earn from mutual funds?

Mutual fund returns vary based on the fund type (equity, debt, hybrid). Historically, equity funds have delivered around 12% annualised returns.

What is Rs. 10,000 SIP for 30 years?

Investing Rs. 10,000 monthly via SIP for 30 years can potentially grow into a substantial corpus due to compounding.

Is it better to invest in PPF or NPS?

PPF (Public Provident Fund) is safer and offers guaranteed returns. NPS provides higher market-linked returns but involves some risk.

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