The decision between NPS vs mutual fund for retirement depends on your financial goals, investment horizon, need for liquidity, and preferred investment approach. NPS is a voluntary retirement savings scheme managed by the PFRDA. It is designed to build a retirement corpus and provide regular inflows post-retirement.
In contrast, mutual funds are investment vehicles managed by Fund Houses which are governed by SEBI. They pool money from multiple investors and invest in assets such as equities, debt securities, commodities, or a combination of these. These schemes may help investors create potential wealth for a variety of financial goals, including retirement.
There is one question most Indian investors debate during every tax season and market rally:
- NPS vs Mutual Fund for Retirement: What to Choose?
Realise that both the financial products invest in asset classes such as equities, debt, and government securities. However, they are built for different purposes! NPS may primarily focus is to potentially secure your retirement, while mutual funds aim to create potential wealth and offer a comparatively greater liquidity.
So, NPS or a mutual fund which is better? Read this article to first learn about NPS and its primary features. Next, check out the NPS vs mutual fund comparison and see which financial product may potentially let you build a larger corpus by age 60.
Table of Content
What is the National Pension Scheme (NPS)?
The NPS is a government-backed and voluntary retirement savings scheme. It may help individuals build a “pension corpus” and secure a regular inflows after retirement.
The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is open to all citizens of India, including Non-Resident Indians (NRIs), aged 18 to 85 years.
Let’s understand the various types of accounts offered under NPS and the available investment choices:
A) Types of NPS Accounts
The NPS offers two types of accounts: Tier I and Tier II. Both accounts allow you to invest in market-linked assets, but serve different purposes. Tier I is the primary retirement account with withdrawal restrictions, whereas Tier II is an optional account that offers greater access to your money.
Let’s understand in detail:
| Feature | Tier I Account | Tier II Account |
| Purpose | “Primary” retirement account meant to build a retirement corpus. | “Optional” investment account for saving or investing outside your retirement corpus. |
| Who Can Open It? | Any eligible individual can open a Tier I account. | You can open a Tier II account only if you already have an active Tier I account. |
| Withdrawals | Withdrawals are allowed only under the exit and withdrawal rules prescribed by NPS. | You can withdraw money whenever you need, without restrictions. |
| Minimum Contribution to Open | ₹500 | ₹250 |
Minimum Annual Contribution
| ₹1,000 every financial year to keep the account active. | No minimum annual contribution requirement. |
| Annual Maintenance Charges (AMC) | AMC is applicable. | No separate AMC is charged for the Tier II account. |
| Transfer of Funds | Not applicable. | You can transfer money from Tier II to Tier I whenever you choose, subject to the applicable rules. |
B) NPS Investment Choices
When you invest in the NPS, you can decide how your money is invested through two options: Active Choice and Auto Choice. The “Active Choice” gives you control over your investment allocation, while “Auto Choice” manages the allocation based on your age and selected risk level.
Let’s understand in detail:
A) Active Choice
Under Active Choice, you can invest your contribution across different asset classes, subject to the following limits prescribed by NPS:
| Asset Class | Investment Type | Maximum Allocation |
| E | Equity (shares of listed companies) | Up to 75% |
| C | Corporate Debt (bonds issued by companies) | Up to 100% |
| G | Government Securities (government bonds) | Up to 100% |
| A | Alternative Investments (such as REITs, InvITs, AIFs, etc.) | Up to 5% (available only in Tier I accounts) |
B) Auto Choice Options
With Auto Choice, NPS invests your money according to a “predefined life-cycle model”. At a younger age, a larger portion may be invested in equities to seek higher potential growth. But as you grow older, the allocation may gradually shift towards corporate debt and government securities to reduce investment risk.
In NPS, you may choose one of the following life-cycle options based on your risk preference:
| Auto Choice Option | Risk Level | Potential Characteristics |
| Life Cycle 75 | High |
|
| Life Cycle 50 | Moderate |
|
| Life Cycle 25 | Low |
|
| Life Cycle (Aggressive) | Very High |
|
Note: In all Auto Choice options, the proportion invested in equities and corporate debt decreases as you age, while the allocation to government securities increases according to the predefined life-cycle model.
Want to learn more about retirement planning? Explore educational articles on asset allocation, SIPs, budget planning, taxation, and other investment concepts. |
NPS vs Mutual Fund Comparison: How Do These Products Differ?
When it comes to NPS vs mutual fund for retirement, realise that both products are “market-linked”. However, their design, rules, and benefits are different. For better clarity, let’s understand the NPS vs mutual fund comparison in detail:
| Parameter | National Pension System (NPS) | Mutual Funds |
| Primary Objective | Build a retirement corpus and provide inflows after retirement. | Create wealth for different financial goals such as buying a house, funding education, retirement, or generating a regular income. |
| Investment Options | Invests in equities, corporate debt, government securities, and alternative assets. | Offers different fund categories, including equity, debt, hybrid, index, commodities, sectoral, and international funds. |
| Investment Control | You can choose Active Choice or Auto Choice for asset allocation. | You choose the mutual fund scheme based on your investment objective and risk appetite. |
| Lock-In Period | A Tier I account has withdrawal restrictions until retirement, subject to NPS rules. | Most mutual funds have no lock-in. However, ELSS funds, Retirement Funds & Children Funds have a mandatory lock-in period. |
| Liquidity | Limited liquidity in Tier I due to withdrawal rules. However, Tier II offers unrestricted withdrawals. | High liquidity in most open-ended mutual funds, with redemption available on any business day. |
| Tax Benefits | Eligible for tax deductions under the applicable provisions of the Income Tax Act, subject to prevailing rules. | Tax benefits are available only for ELSS funds under the applicable tax provisions under the old regime. |
| Risk Level | Depends on the chosen asset allocation, however, under Auto Choice, the portfolio may become more conservative with age. | Depends on the type of mutual fund selected, ranging from low-risk debt funds to very high-risk equity funds. |
| Returns | Market-linked returns are based on the performance of the selected asset allocation and pension fund manager. | Market-linked returns based on the performance of the selected mutual fund scheme. |
NPS vs Mutual Fund For Retirement: Which Investment Option May Build a Bigger Corpus by Age 60?
The size of your retirement corpus depends less on the investment product chosen and more on:
- How much do you invest
- How long you stay invested, and
- The returns your portfolio earns.
If two investors contribute the same amount for the same investment period, an equity mutual fund may potentially build a larger requirement corpus than NPS. Potential reason?
- That’s because equity schemes may continue to maintain a higher allocation to equity and equity-related instruments throughout the investment horizon.
- In comparison, NPS follows prescribed asset allocation limits. Under the “Auto Choice” option, the equity allocation is reduced gradually as the investor ages.
However, realise that returns are market-linked and depend on factors such as market performance, the chosen investment strategy, and the underlying portfolio.
Additionally, in many cases, investors even use both products together. In this combined approach, NPS serves as a dedicated retirement plan, while mutual funds may build potential “additional wealth” that can supplement retirement income.
Past performance is not indicative of future results. There are no guaranteed or assured returns under any of the mutual fund schemes.
Conclusion
So, now you are aware of the NPS vs mutual fund comparison and which investment option may have the potential to build a larger retirement corpus. To recap, the NPS is a voluntary retirement savings scheme designed to help individuals build a pension corpus and receive income after retirement. It allows investments across four asset classes: (E) equity, (C) corporate debt, (G) government securities, and (A) alternative investments.
In contrast, mutual funds are designed for a broader range of financial goals. They offer access to multiple fund categories (equity, debt, and hybrid), and, in most cases, provide comparatively easier access to money than NPS.
When it comes to building a bigger corpus by age 60, equity mutual funds may potentially offer higher growth than NPS. That’s because:
- Many equity schemes can remain predominantly invested in equity and equity-related instruments throughout the investment period.
- In contrast, NPS follows prescribed asset allocation limits, and under the Auto Choice option, the equity allocation gradually reduces with age (while the allocation to debt-oriented assets increases).
However, returns are market-linked and NOT guaranteed. The final retirement corpus depends on factors such as the investment amount, investment duration, asset allocation, and market performance.
For more information, you can visit www.tatamutualfund.com/deshkarenivesh. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com
NPS vs Mutual Fund For Retirement FAQs
1. Should I invest in NPS or a mutual fund?
Your choice depends on your financial objective. If your primary goal is to build a retirement corpus and you are comfortable with restricted withdrawals, NPS may be potentially suitable.
Whereas, if you want flexibility to invest for different goals and need comparatively better liquidity, mutual funds may potentially be a better fit. Many investors even use a combination of both financial products.
2. Does NPS carry a lower risk than mutual funds?
Realise that both NPS and mutual funds are market-linked investments. The level of risk depends on the underlying assets.
As per general market understanding, NPS may become more conservative with age under “Auto Choice”. At the same time, mutual funds offer schemes with different risk levels, ranging from debt funds to hybrid funds to equity funds.
Disclaimer
- An Investor Education and Awareness Initiative by Tata Mutual Fund.
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- This communication is a part of investor education and awareness initiative of Tata Mutual Fund.
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
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