NPS Vs SIP

NPS and SIP are both popular investment options. NPS, or National Pension Scheme, focuses on building a secure retirement fund. SIP, or systematic investment plan, is ideal for achieving specific financial goals through mutual funds over a set period.
NPS vs. SIP
3 min
12-June-2024

NPS (National Pension Scheme) and SIP (Systematic Investment Plan) are popular investment options for short-term goals and post-retirement planning. SIPs in mutual funds suit specific short-term goals, while NPS is ideal for a stress-free retirement. Choosing between them requires careful planning.

For any investor, choosing between two different investment avenues or options is a common yet challenging part of investing. One such dilemma that you may need to make is the NPS vs SIP comparison. In this article, we delve into the meaning of the National Pension System (NPS) and Systematic Investment Plan (SIP), discover their features and look at how they are different from one another.

What is the National Pension System (NPS)?

The National Pension System (NPS) is a voluntary retirement savings scheme in India. It is an initiative designed by the Indian government to provide retirement income to all citizens. The Pension Fund Regulatory and Development Authority (PFRDA) is responsible for overseeing this scheme, so you can rest assured that your investments are transparent and secure.

If you opt for the NPS, you can invest in a pension account over the course of your employment. When you retire or when you attain 60 years of age, you can withdraw a part of the corpus as a lump sum amount. The remaining amount can be used to purchase an annuity that ensures regular pension payments after retirement.

NPS offers two types of accounts:

  • Tier-I, which is a pension account with restrictions on withdrawal
  • Tier-II, a voluntary savings account from which subscribers can withdraw money freely

The scheme is also quite flexible as you can choose your investment mix from among different options like equities, corporate bonds, government securities and alternative assets. Additionally, contributions to NPS are eligible for tax deduction under sections 80C and 80CCD of the Income Tax Act.

What is a Systematic Investment Plan (SIP)?

A SIP is a method of investing and not an investment scheme or option like the NPS. SIPs are most commonly used to invest in mutual funds. Here, you invest a small fixed sum periodically in the mutual fund of your choice. This is easier for the average retail investor than a lump sum investment, which requires a large capital outlay.

Investing in mutual funds via a SIP also gives you various other benefits like rupee cost averaging, compounded returns and the flexibility to choose your investment budget. What’s more, you can choose from different mutual funds with varying investment tenures that align with each of your financial goals.

This level of heightened flexibility is an important aspect to consider in your SIP vs NPS comparison. Before you start a SIP, however, you need to be clear about the amount that you want to invest each month and the returns that you expect. A SIP calculator can help you plan your SIP investments in mutual funds more smartly.

NPS vs SIP - Explore Key Differences

Now that you know the meaning of NPS and SIP as well as their key features, check out the SIP vs NPS comparison in the table below.

Aspect

NPS

SIP

Meaning

A retirement-focused investment scheme

A method of investing in different assets, primarily mutual funds

Purpose

To earn pension benefits in retirement

To invest in mutual funds and fulfil different financial goals, including retirement planning

Investment options

Equities, corporate bonds, government securities and alternative assets

Equity funds, debt funds, hybrid funds and other types of mutual funds

Returns

Depends on the asset classes chosen and the proportion of investment in such classes

Depends on the type of mutual fund and the market performance

Risk

Can be tailored from low to high levels of risk depending on the asset allocation

Varies according to the market and depends on the specific mutual fund chosen

Liquidity

Limited liquidity due to withdrawal restrictions and regulations

Generally higher liquidity (especially if you choose open-ended mutual funds(

Investment tenure

Long-term tenure till the age of 60 or retirement

Flexible; can range from short-term to long-term

Tax benefits

NPS contributions and withdrawals offer tax benefits

Only equity funds offer tax benefits on long-term capital gains (up to Rs. 1,00,000)

 

NPS vs SIP - Which Is the Better Option to Choose?

Having seen the details of the SIP vs NPS comparison above, how do you know which of the two alternatives is better for your portfolio? Here are some pointers that can help.

Depending on the retirement goals, NPS may offer the following benefits.

  • A long-term option to safeguard your retirement
  • Tax benefits under sections 80C and 80CCD
  • Government-regulated investment avenue
  • A source of pension after you retire

Depending on the financial goals SIP in mutual funds may offer following benefits.

  • Flexibility of withdrawing funds as needed
  • An option to adjust the investment amount and pause the contributions as needed
  • Comfort of liquidity and flexibility

Conclusion

The choice of NPS vs SIP in mutual funds or other schemes depends on various factors. Now that you know what these investment options entail, you can decide which of the two is a better fit for your portfolio.

If you decide to make SIP investments in mutual funds, you can check out the 1,000+ schemes listed on the Bajaj Finserv Mutual Fund Platform. With so many mutual fund schemes available, you can evaluate your options, compare mutual funds and choose those that align with your risk-reward preferences.

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator

SIP Calculator

Lumpsum Calculator

Step Up SIP Calculator

Brokerage Calculator

FD calculator

Mutual Fund Calculator

Frequently asked questions

Is it better to invest in SIP or NPS?

The choice of NPS vs SIP depends on your financial goals, risk tolerance and investment horizon. SIP may be a better choice if you prioritise flexibility and liquidity. NPS may be better for you if you want to set up a source of regular income for your post-retirement life.

Does NPS allow SIP?

Yes, you can invest in NPS using a Systematic Investment Plan (SIP). You can set up a SIP via your Point of Presence (PoP).

What are the disadvantages of the NPS scheme?

The limitations of NPS investments include complexity, strict withdrawal rules and a cap on equity investments.

Is it risky to invest in NPS?

Your NPS investments can be tailored according to your risk preferences. You can choose from three asset classes: equity, government securities, corporate bonds and alternative assets.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.