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NPS or mutual funds: Where to invest?

Preparing a retirement plan is a crucial aspect of life. When done strategically and carefully, it ensures financial stability and a life of comfort after retirement. However, improper strategic planning for retirement corpus generation can adversely impact the preparedness for a stable financial future. Thus, to accumulate an adequate retirement corpus, it is not just vital to invest as early as possible but also to invest in financial options that deliver inflation-beating returns. National Pension System (NPS) and mutual fund investment are 2 such popular investing options known to generate adequate post retirement corpus.

What is the National Pension System (NPS)?

NPS was started by the Indian government as an initiative for social security. You can allocate a specific amount from your income into this scheme to gain benefits of it in your golden years. Once you retire, you can withdraw a portion of the corpus and the balance amount gets credited to the account each month. The investment option is also extremely popular among investors because of the safety it provides.

NPS has various benefits. Firstly, it permits voluntary contribution. It means you get the flexibility to enhance or lower your contribution annually. Next is the flexibility to choose between the active or auto option and equity exposure as per risk appetite. As NPS is regulated by PFRDA or Pension Fund Regulatory & Development, there is full transparency in administration.

What is a mutual fund?

A mutual fund is an investment option that is professionally managed. It collects investments from various investors and invests the accumulated fund in the best way possible to maximise returns and attain the investment objectives. These funds are professionally allocated across industries, sectors, and debt securities. You can simply invest in mutual funds via SIP or lumpsum amount. With mutual funds, you should always review to find if the fund’s investment objectives match with your goals. Next, review other parameters like liquidity, time horizon, equity, or debt exposure to make the choice.

Benefits of mutual funds include diversification across fund classes to lower risk, professionally managed by fund managers, tax benefit through ELSS fund, well regulated by SEBI, completely transparent with terms and conditions mentioned on KIM, SID etc. and potential to generate higher returns.

NPS vs mutual fund – Which option is better?

Both the National Pension System and mutual fund investment allow tax deductions as per Section 80C. Both come with a lock in period, however, here mutual funds hold an advantage. ELSS funds’ lock in period is 3 years while National Pension System permits withdrawal just after the attainment of 60 years of age or during the retirement time. NPS has set strict rules for making premature withdrawals. Premature withdrawals are allowed only after 10 years of NPS tenure completion. In such cases, you can just withdraw 20% of the accumulated NPS corpus and the remaining 80% must be used to buy annuity for monthly pension. However, if the overall accumulated corpus is less or equivalent to Rs. 1 lakh, you can avail the option of full withdrawal without purchase of annuity.

On the tax benefit front, NPS holds a little edge. Besides the tax benefit of up to Rs. 1.5 lakh under Section 80C, you can also claim extra tax benefit of Rs. 50,000 as per Section 80 CCD (1B). To the extent of 60% of the corpus, NPS is tax free while the rest of the 40% is taxed according to the income tax slab. Lastly, as both are market linked instruments, the risk exposure for both the options would depend upon how much risk you are ready to bear, based upon your income, age, and other factors.

Key takeaway

Mutual fund and NPS come with their own sets of benefits. Ideally, you should invest in both options. Doing so would give the right balance to your post retirement investments. While mutual fund would ensure capital growth, NPS would ensure capital security and stability. Note that risk averse investors too can take up such balanced investment strategies to reap capital growth rewards. However, aggressive investors can put higher investible funds towards mutual fund investment while moderate ones could opt for​ NPS​ investing​.

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