NPS Vs Mutual Fund – Which Is A Better Investment Plan For 2024

NPS Vs Mutual Fund – Which Is A Better Investment Plan For 2024

As an Indian investor, you have several options to consider, including the National Pension System (NPS) and Mutual Funds. Both these investment plans offer the potential for long-term financial growth. But which one is better suited to your goals?

In this article, we will delve into the details of NPS and Mutual Funds, comparing their features, benefits, and risks. By understanding these investment vehicles thoroughly, you can decide where to invest your hard-earned money. Additionally, we’ll discuss how Koshex‘s platform can provide tailored insights and seamless transactions to empower your financial journey.

Let’s dive into the intricacies of NPS and Mutual Funds!

NPS: Building a Secure Retirement Nest Egg

H3: What is the National Pension System?

The National Pension System (NPS) is a government-sponsored pension scheme designed to provide individuals with a reliable retirement income. It offers two investment choices: Tier-I and Tier-II accounts.

H3: Key Features of NPS

1. Tax Benefits: Contributions made towards NPS are eligible for tax deductions under Section 80C of the Income Tax Act.

  • Maximum deduction of ₹2 lakhs: ₹1.5 lakhs under Section 80CCD(1) and an additional ₹50,000 under Section 80CCD(1B).
  • Tax-exempt employer contributions: Up to 10% of salary (basic + DA), with a limit of ₹7.5 lakhs.
  • Tax-free corpus accumulation: Your invested amount grows tax-free until withdrawal.
  • Lower tax on withdrawals: Only 40% of the withdrawn amount is taxable.

2. Retirement Corpus: NPS aims to create a retirement corpus that can sustain individuals during their golden years.

3. Flexibility in Asset Allocation: Investors can choose between equity funds (E), corporate bonds (C), and government bonds (G) based on their risk appetite.

4. Low Expense Ratio: The expense ratio for NPS funds is relatively low compared to many mutual funds, making it cost-effective for long-term investors.

5. Annuity Options: At retirement, NPS subscribers can utilize their accumulated corpus to purchase an annuity plan to receive a regular income.

Benefits of NPS

1. Pension Security: The NPS ensures a steady stream of income during retirement, providing individuals with financial security.

2. Diverse Investment Options: NPS offers a range of investment choices, allowing investors to diversify their portfolios and minimize risk.

3. Tax Efficiency: Contributions made towards NPS are eligible for tax deductions, while the annuity received at retirement is subject to taxation.

4. Low Management Fees: The fund management fees associated with NPS accounts are relatively lower than many mutual funds, maximizing potential returns.

Risks and Considerations

  1. Limited Withdrawals: NPS restricts premature withdrawals before the age of 60, making it less suitable for individuals who may need immediate access to their funds.
  2. Partial Withdrawals: You can withdraw up to 25% of your contributions (excluding employer contributions) from your NPS Tier 1 account anytime after 3 years. You can make a maximum of 3 withdrawals throughout your subscription, with a 5-year gap between each. All partial withdrawals are tax-free.
  3. Market Volatility: Although diversification helps mitigate risks, market fluctuations can impact the value of equity investments in NPS.
  4. Annuity Rates: The annuity rates offered by various insurance companies can vary, affecting the income received during retirement.

Mutual Funds: Unlocking Wealth Creation Potential

What are Mutual Funds?

Mutual funds pool money from multiple investors and invest in a diversified portfolio of securities such as stocks, bonds, and other assets.

H3: Key Features of Mutual Funds

1. Professional Fund Management: Mutual funds are managed by experienced professionals who actively select and manage investments on behalf of investors.

2. Diversification Benefits: By investing in a variety of securities, mutual funds help spread risk across different asset classes.

3. Liquidity and Flexibility: Investors can buy or sell mutual fund units at any time, offering liquidity and flexibility.

4. Systematic Investment Plan (SIP): SIPs allow investors to invest a fixed amount at regular intervals, promoting disciplined investing.

5. Tax Benefits: Certain categories of mutual funds, such as Equity-Linked Saving Schemes (ELSS), offer tax benefits under Section 80C.

Benefits of Mutual Funds

1. Wealth Creation Potential: Historical data shows that mutual funds have outperformed many other investment options over the long term.

2. Diversification: Mutual funds invest in a broad range of securities, reducing the impact of individual stock or bond performance on overall returns.

3. Professional Management: Fund managers analyze market trends and make informed investment decisions, leveraging their expertise to maximize returns.

4. Flexibility and Liquidity: The ability to buy or sell mutual fund units at any time provides investors with liquidity and the option to rebalance their portfolio.

5. SIP Advantage: Investing through SIPs enables individuals to benefit from rupee cost averaging and mitigate the impact of market volatility.

Risks and Considerations

1. Market Volatility: Mutual funds are subject to market risks, and investments in equities can be particularly volatile in the short term.

2. Management Fees: Mutual funds charge management fees, which can impact overall returns. It is essential to choose funds with reasonable expense ratios.

3. Performance Variability: Not all mutual funds perform equally well over time. Investors should carefully evaluate fund performance history before making investment decisions.

4. Investment goals: Identify your investment goals, whether you seek growth or value, and decide on the category of mutual funds, such as equity, debt, or hybrid funds, that align with your goals.

5.Consistency of returns: Look for mutual funds that have a consistent track record of returns

NPS vs Mutual Funds – Which One Should You Choose?

Retirement Planning or Wealth Accumulation

One crucial factor to consider when deciding between NPS and Mutual Funds is your primary financial goal. If you prioritize building a secure retirement corpus, NPS may be an ideal choice given its focus on pension benefits. On the other hand, if wealth accumulation is your primary objective, mutual funds offer the potential for higher returns over the long term.

Risk Profile and Investment Horizon

Your risk tolerance and investment horizon are significant determinants in choosing between NPS and Mutual Funds. NPS, with its conservative asset allocation options, may suit risk-averse individuals with a longer investment horizon. Mutual funds, particularly equity-oriented funds, are suitable for those willing to take on higher risk in pursuit of potentially higher returns over the long term.

Tax Planning Considerations

Tax planning plays a crucial role in wealth creation. Assess your tax situation to determine which option aligns better with your financial objectives.

Flexibility and Liquidity Needs

When comparing Mutual Funds and NPS, the considerations of flexibility and liquidity are crucial. Mutual Funds offer a far more flexible and liquid investment option. You can readily invest and redeem units at any time, with no lock-in periods except for certain ELSS funds. This allows for greater control over your investments and immediate access to your funds, making them suitable for short-term and medium-term goals.

NPS, on the other hand, presents limited flexibility and liquidity. Tier 1 accounts have a lock-in period until retirement, and while partial withdrawals are allowed under specific conditions, they are restricted to a maximum of 25% of your contributions and can only be made after 3 years. This makes NPS less suitable for short-term needs and requires a long-term investment horizon.

Conclusion: Making Informed Investment Decisions

Choosing the right investment plan for 2024 requires careful consideration of your financial goals, risk appetite, and investment horizon. While NPS focuses on securing a stable retirement income, mutual funds offer the potential for wealth creation over the long term through their diversified portfolios.

Before making any investment decisions, you must do thorough research and see what suits your lifestyle and goals. Koshex provides personalized insights and seamless transactions to empower your financial journey. Sign up with Koshex today to gain access to tailored strategies that can help you achieve your financial goals.


Q1: What makes NPS a suitable retirement planning option?

A1: The National Pension System (NPS) aims to create a reliable retirement corpus through tax-efficient contributions and annuity plans at retirement. It provides pension security for individuals during their golden years.

Q2: Can I invest in both NPS and Mutual Funds simultaneously?

A2: Yes, you can invest in both NPS and Mutual Funds simultaneously. This allows you to diversify your investment portfolio and benefit from the unique features of each investment option.