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In order to plan for retirement, it is imperative that a carefully thought-out strategy is developed. For centuries, investing has been a wise way to build discipline and financial security after retirement.  

Due to the market’s volatility and employment instability, especially during these difficult times, many investors have come to understand the importance of saving and investing. While saving money has become more difficult in today’s world, as there are so many investment options, it can be a bit overwhelming at times. 

Mutual funds and National Pension Scheme both products provide the same benefits. However, they also have a number of significant differences as well as some unique characteristics that make them unique. Your financial needs and goals will determine which of these plans is best for you as an investor. 

What is National Pension Scheme (NPS)? 

The National Pension Scheme (NPS), a government initiative, is open to employees of the public, private, and unorganized sectors. NPS accounts can be opened by investors, and recurring deposits can be made.  

Upon retirement, the member has the option of receiving part of the deposit as a lump sum. Income Tax Act 1961 section 80C allows deductions for investment amounts up to Rs. 1.5 lakh. 

Furthermore, section 80CCD of the Act allows the investor to deduct up to Rs 50,000 per fiscal year. 

Benefits of National Pension Schemes 

  • National Pension Scheme are backed by the government, they pose a very low risk to investors. Therefore, it is one of the safest investments. 
  • NPS meets the needs of investors looking for long-term investments. 
  • In accordance with Income Tax Act 1961’s  Sections 80C, and 80CCD, the scheme provides tax advantages. 
  • With a minimum contribution of Rs. 1000, you can begin an optional Tier II account once you have set up the Tier I account, which can be fully withdrawn unlike the Tier I account 
  • From 2016, withdrawals from NPS are tax-free up to 40% of the total accrual. 
  • NPS is the only fund available to investors that permits them to switch fund managers once per fiscal year out of the seven available options. 
  • Equity, corporate debt, government bonds, and annuities are the four asset types that NPS investors invest in. It is important to note that NPS funds are exposed to a wide variety of assets, which disperses risk, thereby reducing the risk of volatility in the equity market. 

What are Mutual Funds? 

Fund managers professionally manage mutual funds, which are pools of money. Invested in stocks, bonds, money market instruments, and many other assets of this type, the trust receives funding from a group of individuals with similar financial goals. A mutual fund distributes the income and profits generated by its collective investment proportionately to its participants after deducting applicable fees and taxes. Mutual funds are simply a collection of money contributed by a variety of investors. 

Benefits of Investing in Mutual Funds 

  • In order to maximize investment growth opportunities, it is managed by a team of money management specialists. 
  • A mutual fund provides investors with a diversified portfolio of stocks, bonds, market sizes, sectors, and industries. 
  • Thus, it offers expert management, flexibility, and variety at an affordable price. Typically, a charge between 0.50% and 1.50% is levied. 
  • With no lock-in period, you can redeem your assets at any time. There is, however, a 3-year lock-in period for ELSS investments.  
  • When investing in mutual funds, Systematic Investment Plans (SIPs) provide a sense of confidence. 
  • Due to their open-ended nature and lack of a lock-in period, mutual funds are considered highly liquid investments. Mutual funds may be of assistance to investors in the event of a financial crisis. 
  • Due to the fact that mutual funds do not have a lock-in period, they are much more flexible than other investment programs. An investor may enter or exit a mutual fund at any time. 

When deciding between mutual funds and NPS, consider the following characteristics or metrics. 

Mutual Funds vs National Pension Scheme: Which is preferable? 

  • Allocation of Equity and Exposure 

NPS invests a smaller percentage of its assets in equity-oriented mutual funds compared to ELSS. As a result, ELSS is potentially more profitable than NPS. 

  • Exposure to Risk 

ELSS has a higher investment risk than NPS due to its greater exposure to equity-oriented mutual funds. Meanwhile, the risk factor is determined by investor tolerance for risk based on their financial situation. 

  • Tax Deduction 

There are tax advantages associated with both types of investing. As opposed to equity mutual funds, which have long-term profits taxed at 10% upon exit, NPSs offer greater tax advantages. NPS plans are eligible for a higher tax deduction than ELSS plans of up to Rs 2 lakh under Sec 80C. NPS offers the advantage that you may withdraw up to 60% of your corpus without incurring taxes, while the remaining 40% is tax-free at maturity. 

  • Fund Management Costs 

NPS offers the most affordable managed fund for retirement with a management fee of 0.1%. By comparison, asset management firms or mutual funds charge an expense ratio of 0.50% to 1.00%. There is a significant difference between the cost of administering the NPS and the cost of administering the NPS. 

  • The flexibility of Withdrawals 

Tier I NPS investments, which are required to open an NPS account, are restricted from withdrawals. Until you reach the age of 60 or have completed at least 10 years of investment, you will not be able to reclaim your entire investment. A partial withdrawal is possible if the criteria are met, up to a maximum of 25%. Due to this, you are limited in your ability to invest. It is not possible to invest more than 75% of your total NPS investment in stock through NPS. 

You have a great deal more choice when it comes to choosing alternatives, schemes, and investing time horizons with equity mutual funds, whether they are tax-advantaged ELSS or not. Make the most of this flexibility in order to build a retirement corpus that meets your retirement needs. 

Considerations for Investors When Selecting NPS vs Mutual Funds 

In terms of investment alternatives, both NPS and Mutual Funds still have financial discipline in the lives of investors since the cash is automatically withdrawn from their registered accounts at specific intervals. Withdrawals can be made as required. As a result of the flexibility they provide, mutual funds are now frequently used as emergency savings. 

If your primary goal is to benefit from tax advantages and to invest in low-risk investments during retirement, you should consider investing in NPS. 

Moreover, your contributions to the NPS and your employer’s contributions during your employment may be deducted under Section 80CD of the Income Tax Act. You can also claim an NPS tax advantage of up to Rs.50,000 for any additional contributions you make to the program under Section 80CCD. Furthermore, in the 2019 budget, NPS was classified as an EEE (Exempt-Exempt-Exempt). 

In other words, NPS subscribers can deduct their NPS contributions from their taxes, and returns received on their contributions are tax-free. With tax benefits extended on lump sum withdrawals, NPS becomes an Exempt-Exempt-Exempt (EEE) plan. On the other hand, capital gains from mutual funds are subject to both short- and long-term taxation. 


Based on their commonalities and differences, investors can make a decision based on their financial priorities. However, NPS must be your first choice to secure your financial future.  

In addition to being popular among those with high-risk tolerance and short-term financial goals, mutual funds can also serve other purposes. However, if you still feel confused, you can seek the advice of a financial advisor or an investment management firm such as Rurash Financials.  

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