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SIP vs. NPS – Advantages, Comparison, FAQs

Written by - Akshatha Sajumon

January 12, 2022 6 minutes

Do you have concerns regarding your retirement? Don’t know where to invest your money for a worry-free retirement? Don’t be concerned. This article covers all the information about the most popular retirement investment options and the benefits they provide.

What is a Systematic Investment Plan (SIP) ?

Mutual fund SIPs are the most popular investment solutions among young people today. A SIP allows you to invest a certain amount in mutual funds on a regular basis. The money designated for financing will be deducted from your account each month and used to purchase units of the mutual fund in which you wish to invest.

Advantages of SIP

Investing in SIP has the following benefits – 

  • Benefits of Compounding: Mutual fund investments distributed over a lengthy period of time are liable for compounding. Earnings reinvested rise at the same rate as returns while compounding. When opposed to one-time investments, compounding helps you to develop wealth at a faster rate through long-term investments.
  • Promotes Investor Discipline: When it comes to money management, investing in mutual funds with the help of SIPs will help you maintain financial discipline in your life. You only have to set up automatic payments to your mutual funds. The preset cash will be deducted automatically from your savings account and invested in your choice of mutual fund.
  • Higher Returns: When compared against traditional investing options, mutual funds have consistently led the pack in terms of providing significant returns for beating inflation.
  • Effortless Investing: Most people who want to become investors are still unsure of how much money they will need to set aside for mutual fund investing. SIP addresses this issue by allowing you to begin investing with as little as Rs 500. You will not only be able to reduce the strain on your finances, but you will also be able to manage your budget correctly.
  • Rupee Cost Averaging: Because the equity market is volatile, you can buy more shares while the market is not performing well and vice versa. Rupee cost averaging aids in lowering the cost calculated per single unit.
  • Rainy Day Fund: Mutual funds via SIP can also be used as an emergency fund if you ever happen to be in a financial crisis, such as a serious sickness or unemployment. 

National Pension Scheme (NPS)

The National Pension Scheme was established by the Central Government and can be used as a social security effort for those working in different sectors. You will be expected to contribute a specific portion of your salary to a pension account on a monthly basis under this program. You will be able to take out a set amount of the whole corpus at maturity or retirement. The remainder of the corpus will be credited to your account on a monthly basis in the form of a pension.

Use NPS Return Calculator for better understanding

Advantages of NPS

Investing in NPS has the following benefits –

  • Voluntary Contribution: You have the choice to choose when to contribute to the program throughout an assessment year. Similarly, he/she can opt to increase/decrease the amount he/she desires to invest on a yearly basis.
  • Containment Risk: The NPS program’s exposure to stocks is only 50%. The exposure to stocks is determined by a variety of parameters, including subscriber profile, kind of NPS account, and so on. This ensures that the fluctuating equity market has no effect on the total sum generated at maturity.
  • Offers Flexibility: NPS members have the flexibility of selecting from a wide range of investment options to build their pension fund. This gives you an advantage in determining which funds you can pick while you’re trying to build your wealth at the same time.
  • Transparency: The Pension Fund Regulatory and Development Authority oversees the NPS scheme (PFRDA). The NPS Trust makes sure that your investments are in accordance with regulatory standards, and the company will monitor the fund managers and review as needed.

Period of Lock-In

The lock-in time for SIP in ELSS funds is fixed at three years and there is no lock-in period for other SIP investments.. But NPS will allow you to take out the preset sum only when you reach the age of 60 when you retire or premature withdrawals are allowed under certain predetermined cases 

Tax Advantages

Section 80C of the IT Act of 1961 allows for tax deductions on both NPS and SIP investments. 

NPS: Under Section 80CCE of the IT Act, an NPS investor will be eligible for tax deductions up to Rs 1.50 lakh of gross income. Furthermore, under Section 80CCD (1B) of the Income Tax Act of 1961, you can claim tax benefits of up to Rs 50,000 on your investment in an NPS (Tier I account).

SIP in Mutual Funds: To receive tax benefits for SIP in mutual funds, you must invest in an ELSS, or equity-linked savings scheme. Taxpayers are eligible for deductions of up to Rs 1.50 lakh on ELSS investments made under Section 80C of the IT Act. 

It is recommended that you assess your financial goals before deciding on the type of investment you want to make.


  1. How should one decide between NPS and SIP investments?
    Individuals who want to prepare for a stress-free retirement life should consider NPS. ELSS, on the other hand, is better suited to consumers wishing to save money for short-term financial goals.
  1. What is the difference in the lock-in period of SIP and NPS schemes?
    The lock-in time for SIP is fixed at three years. NPS will allow you to withdraw the corpus only when you attain the age of 60 or when you retire.
  1. Which scheme gives higher returns? NPS or SIP?
    Compounding occurs when mutual fund investments are spread out over a long period of time. Earnings that are reinvested grow at the same pace as returns that are compounded. Compounding, as opposed to one-time investments, allows you to accumulate money at a faster rate through long-term investments.

    In terms of offering large inflation-beating returns when compared to traditional investment options, mutual funds have regularly led the field.
  1. Do I need a large amount of money to invest in an SIP scheme?
    This problem is addressed with SIP, which allows you to start investing with as little as Rs 500. You will not only be able to relieve financial stress, but you will also be able to properly manage your budget.
  1. Which scheme should I invest in if I am risk averse?
    The NPS program’s equity exposure is limited at 50%. This ensures that fluctuations in the equity market have no impact on the corpus generated at maturity.

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