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NPS vs Mutual Fund – Which is a Better Investment Plan for 2023

Written by - Akshatha Sajumon

January 9, 2023 7 minutes

Investing your money has always been a good way of achieving both financial stability and discipline. With frequent fluctuations in the market and uncertainty of employment, especially during the challenging times we are facing, a lot of us have realised the importance of savings and investments. The saving part is usually easy but when it comes to investments the diversity of options available may seem overwhelming!

For the purpose of this article, we are going to focus on two such investment options— NPS vs Mutual fund. Although both these schemes are market-linked and have a number of similar benefits, there are some significant differences between the two and also specific individual advantages.

We will go through each of these schemes individually as it is important to understand them before deciding which one to choose.

NPS- What is it?

The National Pension System or NPS is an investment system launched by the government of India in 2004 and was made available to all sections of working professionals by the year 2009. Any Indian working professional from the age of 18-60 years can apply to this scheme. 

NPS is your long-term investment option and a great way to secure your post-retirement life. By investing in NPS, you get to contribute to a pension account on a regular basis, and on retirement, you can withdraw a part of accumulation while using the other part for buying annuities which helps secure your post-retirement income.

For example:

Mr. Sharma has been investing in NPS for the past 10 years at a contribution of Rs. 1,00,000/year with a rate of interest of 9% p.a. (the interest rates vary from 9% to 12% p.a.) Now after his retirement, he decided to withdraw a part of the corpus in a lump sum.

Investment amountTotal term period Interest RateTotal amount
1,00,00010 years9%1,90,000

Although according to the terms of NPS, he can only withdraw 60% of his wealth i.e., 1,14,000 while the 40% i.e., 76,000 must be spent to buy annuities.

Use NPS Return Calculator for better understanding

Benefits of NPS

  • NPS is subject to Exempt Exempt Tax (EET), which implies that your contributions are not taxed, your accumulation is only taxed on withdrawal. In addition to that, the accumulations used for buying annuities are not taxable. So if you use 100% of your wealth to buy annuities, there will be no tax deductions.
  • Once you open the mandatory Tier I account, the Tier II account is voluntary with a minimum contribution of Rs. 1000 which can be withdrawn completely as opposed to Tier I account.
  • It is a good long term investment plan and helps to secure your long term goals.
  • After 2016, the withdrawal from NPS on maturity is tax free upto 40% of the total accumulated amount.
  • The NPS investors enjoy tax benefits of upto 1.5 lakh with additional benefits of 50,000 rupees.

Mutual Funds- What are they?

Mutual funds are formed by money pooled by a large number of investors having common investment objectives. This money is invested in bonds, equities, market shares, and each investor owns units representing portions of the holdings. The gains through these funds are proportionately distributed among all the investors.

There are basically two modes of investments in mutual funds— SIP and Lump sum. SIP (Systematic Investment Plan) is a relatively more preferred and safer mode of investment that allows you to invest in your corpus at fixed intervals; as compared to the lump sum mode which requires you to pool in the corpus in one go. When you invest through SIP, you don’t need to monitor the market trends given rupee cost averaging and are at a much lesser risk of loss.

For example- 

Raj invested in mutual funds through SIP, while Reena invested through Lump sum. While both of them were enjoying the benefits of their respective plans, Raj was much more relaxed as he didn’t have to keep up with the market trends while Reena was often stressed about the ‘right time’ to invest.

Types of Mutual Funds

  1. Equity funds – Investing in Equity mutual funds gives you higher returns and helps with long term planning.
  1. Debt mutual funds– Investing in Debt mutual funds involve a lesser risk as compared to equity funds. They also have a fixed maturity rate thereby reducing the potential risk and improving the sense of security.
  1. Balanced or hybrid mutual funds– By investing in Hybrid mutual funds, the investor gets to enjoy the benefits of both equity and debt mutual funds. 

Advantages and Benefits of Mutual Funds

  • Mutual funds except ELSS funds have no specified lock in period, which allows the investor to withdraw the funds at any time.
  • Systematic Investment Plan or SIP provides a sense of security while investing.
  • As mentioned earlier, as most mutual funds have no lock in period and are open ended, it provides high liquidity. The investors can depend upon the mutual funds in case of any financial issues.
  • As compared to other investment plans, mutual funds are way more flexible, again due to their no lock in period characteristic. The investor can enter and exit a mutual fund at any time.
  • Mutual funds provide different plans to invest in based on your long term and short term financial goals.
  • According to the section 80C of the Income tax Act, the ELSS(Equity Linked Savings Scheme) offers tax exemptions for investments upto 1.5 lakh. 

NPS vs Mutual Fund – Making the right Choice

Now that we have covered the individual aspects of both NPS and Mutual funds, it’s time to make the right choice and choose the investment that’s more suitable to you. To make this a little easier let’s compare both of the above considering few important parameters—

ParametersNPSMutual Funds
Investing amountMinimum 6000Minimum 100
RiskLesser riskHigher risk
Lock in periodTill retirementNo lock in period for funds other than ELSS funds
Pre withdrawalOnly 20% of total amount can be withdrawnCan be redeemed anytime
Tax benefitUpto 1.5 lakhs with additional benefits of 50,000 rupeesELSS exempts tax to investments upto 1.5 lakhs


After studying both the investment systems and learning about their differences, you may find that each of them has its own benefits as well as risks. While NPS is great for long-term investments and a much safer option, mutual funds help in achieving your short-term goals and are more liquid and flexible in terms of withdrawal.

Both NPS and mutual funds are great options, the key to choosing the right one is setting your goals and analyzing which plan suits your requirements and financial goals. If what you are looking for is your retirement plan and securing your post-retirement life, NPS is the way to go. However, if you are willing to take some risks and have short-term goals like having your own home, buying yourself a luxurious car someday then investing beta in mutual funds will be a much better option.

Frequently Asked Questions

Which investment benefit is NPS and Mutual Fund best known for?

NPS ensures stability and security of investment, whereas, mutual funds ensure growth of capital investment.

Is NPS and Mutual Fund eligible for deduction under Section 80 C of Income Tax Act?

Both NPS and equity mutual fund are eligible for deductions under Section 80C.

Can funds be switched among different categories in NPS?

Yes, indeed. The funds can be switched from category to category, namely, equity, corporate bonds and government bonds.

What is the number of investments that an investor can partake in for mutual funds and NPS?

The number of funds that an investor can invest into for mutual funds are multiple. This is not the case for NPS as the subscriber has to stick to only one fund till the end.

Are mutual funds and NPS regulated by the same body?

No. All mutual funds are regulated and monitored by the SEBI (Securities and Exchange Board of India), whereas, NPS is regulated by PFRDA (Pension FUnd Regulatory Development Authority of India).

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