A Thorough Analysis of NPS vs Mutual Funds for 2023

Nps vs Mutual funds

There is a greater need than ever to save and invest in today’s economy due to the high uncertainty surrounding the job and stock markets. While putting money down is simple, many investing opportunities may need clarification. This article intends to give a thorough comparison of two standard investing options: NPS and mutual funds. Although they have a mutually beneficial market connection, each has unique qualities and benefits.

NPS: A Closer Look

The government of India established the National Pension System (NPS) in 2004, and by 2009, it was open to all professionals between the ages of 18 and 60. Because of its focus on long-term investing, the NPS may provide retirees with a stable income stream throughout their golden years. Contributions to the NPS build up in a pension account, from which retirees may take a portion in the form of a lump sum and use the rest to buy annuities.

Take Mr Sharma, for instance, who saved up Rs. 1,00,000 by investing it in NPS at a rate of 9% per year for ten years. Once he reached retirement age, he started taking money out of his savings.

Investment amount |Total term period | Interest Rate |Total amount
1,00,000                    | 10 years                |9%                  | 1,90,000

However, following NPS regulations, he could only withdraw 60% of his wealth (i.e., Rs. 1,14,000), with the remaining 40% (Rs. 76,000) designated for annuity purchase.

Advantages of NPS

Contributions to an NPS are not taxed; taxation occurs only when the funds are withdrawn. The NPS uses the Exempt Exempt Tax (EET) system. There are substantial tax advantages to acquiring an annuity via accumulation.

In contrast to the obligatory Tier I account, the optional Tier II account allows for complete withdrawals with just a Rs. 1000 minimum deposit.

The NPS is a great way to save and invest for the future, guaranteeing the achievement of long-term monetary goals.

At maturity, participants may take up to 40% of their NPS balance tax-free since 2016.

NPS investors may deduct up to 1.5 lakhs from their taxable income plus an extra 50,000 rupees.

Mutual Funds Demystified

Mutual funds are pools of money from several participants who all have the same investing goals in mind. Afterwards, investors get units representative of their investment amounts and dispersed among different financial instruments, including bonds, stocks, and market shares. Systematic Investment Plans (SIPs) and lump sums are the two most common ways to invest in mutual funds. A systematic investment plan (SIP) invests money over time regularly to spread the risk and take advantage of rupee cost averaging.

Take Raj and Reena as an example; Raj invested in mutual funds via SIP, whereas Reena opted for a lump payment. Raj felt more at peace since he didn’t have to constantly keep an eye on the market owing to rupee cost averaging.

Types of Mutual Funds

1. Equity funds: In the long run, you may expect better returns from them.

2. Debt mutual funds: Fixed-maturity funds provide security and stability at a lower risk than equities funds.

3. Balanced or hybrid mutual funds: This kind of fund combines the advantages of equity and debt investments to provide investors with a diversified portfolio.

Advantages of Mutual Funds

Except for ELSS funds, most mutual funds allow withdrawals at any time.
The SIP, or Safer Investment Choice, relieves anxiety about making long-term investments.

Mutual funds’ open-ended nature and lack of lock-in periods make them a reliable source of revenue during economic hardship.

Investors in mutual funds have a lot of flexibility regarding when and how they may enter and exit the fund.

There are a variety of paths you might take to achieve your short- and long-term monetary goals.

Contributions to an ELSS account are eligible for a tax deduction up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.

NPS vs Mutual Funds: Making the Right Choice

After comprehensively exploring both NPS and Mutual Funds, the decision hinges on aligning the investment with your specific goals and requirements. To facilitate this choice, let’s compare them based on key parameters:

Parameters   |   NPS   |   Mutual Funds

Investing amount   |   Minimum 6000   |   Minimum 100

Risk   |   NPS offers lower risk due to its long-term nature   |   Mutual Funds involve higher risk due to market fluctuations

Lock-in period   |   NPS has a lock-in period until retirement   |   Mutual Funds have no lock-in period (except for ELSS)

Flexibility   |   NPS offers lower flexibility due to the lock-in period   |   Mutual Funds provide high flexibility with no lock-in period (except for ELSS)

Pre-withdrawal   |   Only 20% of the total amount can be withdrawn from NPS before retirement   |   Mutual Funds can be redeemed at any time

Tax benefit   |   Up to 1.5 lakhs with additional benefits of 50,000 rupees for NPS   |   ELSS exempts tax for investments up to 1.5 lakhs in Mutual Funds


NPS and mutual funds each have their own set of benefits and dangers. When looking to invest for the long term, NPS is a safe bet, whereas mutual fund excel at meeting short-term objectives because of their high liquidity and adaptability.

Ultimately, your financial goals and risk tolerance will determine whether you are better off investing in an NPS or mutual funds. NPS is the way to go if you want to be sure you have a comfortable retirement. Conversely, mutual funds provide a more dynamic investing alternative if you are willing to take on some risk and have short-term goals.

Frequently Asked Questions

1. Which investment benefit is NPS and Mutual Fund best known for?
– NPS ensures stability and security of investment, whereas mutual funds ensure capital investment growth.

2. Does Section 80C of the Income Tax Act provide a deduction for NPS and mutual fund contributions?
– NPS and equity mutual funds are eligible for deductions under Section 80C.

3. In NPS, is it possible to move money across accounts?
– Definitely. Investors can move their money between stocks, corporate, and government bonds.

4. How many accounts may an individual have with a mutual fund or NPS?
-Mutual fund investors may choose from a wide variety of funds. NPS differs because the subscriber must maintain a single investment portfolio throughout the plan.

5. Does the same organisation oversee both NPS and mutual funds?
– The Pension Fund Regulatory Development Authority of India (PFRDA) is responsible for NPS. However, the Securities and Exchange Board of India (SEBI) governs and controls all mutual funds in the country.