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NPS vs Mutual Funds Unveiled: Investment Insights (2024)

NPS vs Mutual Fund

First, let’s review mutual funds as a type of individual investment and the National Pension System and also review NPS vs Mutual Fund – which one is a better option. Working people may choose to lock in their money in NPS investments to ensure a secure retirement. Conversely, mutual funds are flexible, professionally managed investment choices that combine the capital of several individuals to buy securities. 

Mutual funds and the National Pension System both let investors pool their money for a long time at predetermined, regular intervals (if you choose to invest via SIP). It should be mentioned that a lot of people use SIPs and mutual funds interchangeably. On the other hand, mutual funds are an investment option available to investors through SIPs (Systematic Investment Plans). 

NPS vs Mutual Fund – Which is Better?

NPS vs Mutual Fund – which one is a better option, well Mutual funds and NPS both help you develop financial discipline when it comes to selecting investments because the money is automatically deducted from your registered account at predetermined intervals (especially if you invest via the SIP mode).

Because of their degree of flexibility, mutual funds frequently serve as emergency funds as well. You have the option to take your money out (with no exit load or one, depending on the plan). Therefore, if you want to invest in NPS and want to reduce your risk when it comes to retirement and tax benefits, this is the best option.

Furthermore, NPS provides a tax deduction of up to Rs. 1.5 Lakh for both your employer’s and your contribution to the program under Section 80CD of the Income Tax Act, meaning that you can save on taxes while you work. Moreover, you can also claim any additional self-contribution (up to Rs.50,000) to the scheme under Section 80CCD as an NPS tax benefit.

In the 2019 budget, NPS was also placed in the Exempt-Exempt-Exempt (EEE) category. This suggests that NPS subscribers are now eligible to get tax benefits on lump sum withdrawals, can claim tax deductions on NPS contributions, and that NPS is now classified as an Exempt-Exempt-Exempt (EEE) category product due to the tax benefits granted to returns received on NPS contributions. Conversely, mutual fund capital gains are liable to both short- and long-term taxes.

Depending on your financial goals, you should carefully consider the advantages and disadvantages of different investing strategies before selecting one. NPS is the best option if your primary goal is to protect your finances for retirement. Mutual funds are typically preferred by those with strong risk appetites, short-term financial objectives, and other objectives.

What is NPS? (NPS vs Mutual Fund)

The National Pension Scheme (NPS) is a social security program designed by the government and accessible to all Indian citizens, except those serving in the armed forces, employees of the public or private sector, and those employed in the unorganized sector. You invest a set amount each month with NPS until you achieve your financial objectives or reach retirement age. 

A portion of the corpus is yours to withdraw upon retirement, with the remaining amount being managed by a pension fund manager registered with the PFRDA. Across the country, NPS is governed and overseen by the Pension Fund Regulatory and Development Authority (PFRDA). The National Pension System (NPS) is now accessible to all employed Indian citizens, except those serving in the armed forces.

What are Mutual Funds? (NPS vs Mutual Fund)

Investors looking for economic growth and diversity have options thanks to mutual funds. Mutual fund schemes are managed and run by Asset Management Companies (AMCs), offering investors two options: open-ended and closed-ended. Investors can also select mutual funds with a focus on commodities, debt, or equities. 

High-quality equities listed on stock exchanges such as the NSE and BSE are invested in by equity mutual funds. Money market instruments, sovereign papers, and high-quality corporate bonds are allotted capital by debt mutual funds. Mutual funds with a concentration on commodities invest in commodities like gold and silver.

Why Invest in NPS? (NPS vs Mutual Fund)

Investing in the NPS is a smart choice if you want to start saving for retirement at a young age and face modest financial risks. Its advantage is that it offers a consistent pension for the duration of your retirement, which is especially beneficial for those quitting the private sector. Investing disciplinedly will significantly enhance your quality of life after retirement. If salaried employees wish to optimize their Section 80C deductions, they should investigate this strategy as well. Since many private companies do not provide traditional retirement benefits, private sector employees generally have positive opinions of NPS. Under the Income Tax Act’s Sections 80C and 80CCD, NPS accounts also offer tax benefits.

Why Invest in Mutual Funds? (NPS vs Mutual Fund)

Mutual fund investing provides a flexible and effective approach to increasing your wealth while lowering risk. Investing combines your funds with those of other investors, enabling a knowledgeable fund manager to put together a diverse portfolio of stocks and bonds. Comparing this diversity to individual investments may help distribute risk and produce more stable results. 

To maximize fund performance, knowledgeable fund managers make well-informed investment selections based on in-depth market knowledge and research. This methodical approach might be especially helpful when negotiating intricate financial markets. Furthermore, mutual funds provide liquidity—the ability to buy or sell units as needed—giving you flexibility in how you manage your investments.

NPS vs Mutual Funds: Difference Between NPS vs Mutual Funds

The following are the differences between NPS vs Mutual funds. 

Aspects of Differences Mutual Funds NPS
Risk Management Risks are influenced by investors. Higher equity exposure and related risk are connected with ELSS. Individual conditions determine an individual’s risk tolerance. Limited control over risk management. While a lower equity allocation lowers risk, returns may be impacted.
Tax Benefits Both have tax benefits. NPS permits greater deductions. NPS provides significant deductions.
Equity Allocation ELSS focused mostly on equities due to their high-profit potential. NPS has a lower equity allocation.
Management Costs Mutual funds have varying expense ratios. NPS has a cost-effective 0.1% fee.
Withdrawal Flexibility Mutual funds are flexible; NPS has lock-in till retirement. While mutual funds provide easier access, NPS is more rigid.
Investment Returns Higher returns could be possible with mutual funds, particularly in bull market conditions. NPS historically provides returns between 8%-10%.
Liquidity Mutual funds offer easier access to funds. NPS has limited liquidity and retires with full withdrawals.
Lock-in Period ELSS: 3 years; mutual funds have shorter lock-in. NPS: longer-term (partial withdrawals available after 10 years or at 60).

How to Choose Among  NPS vs Mutual Funds for Investors – NPS vs Mutual Fund?

When thinking about investing alternatives, keep in mind that both NPS vs mutual funds encourage financial discipline by deducting money from your registered account automatically at pre-arranged periods. However, they range greatly in terms of their goals and levels of flexibility.

Mutual Funds as Emergency Savings: Mutual funds are a popular choice for emergency savings since they are flexible. They’re a flexible option because you can take money out whenever you need to. However, NPS does not have this kind of versatility. It’s better suited for retirees who prioritize low-risk investments and are looking for tax benefits.

Tax Benefits of NPS: NPS offers substantial tax benefits for the duration of your employment. Contributions to NPS made by you and your employer are eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80CCD of the Income Tax Act. Additionally, any self-contributions (up to Rs. 50,000) can be claimed as an NPS tax benefit under Section 80CCD. This suggests that tax benefits for lump-sum withdrawals, tax deductions for NPS payments, and tax-free returns on NPS contributions will be available to NPS members.

Ultimately, your financial objectives should guide your choice between  NPS vs mutual funds. If getting tax benefits and securing your financial future are your top priorities, NPS is a good choice. Conversely, those who have different investing objectives, a higher risk tolerance, and short-term financial goals typically choose mutual funds.


The decision between NPS vs Mutual Fund is based on your investment horizon, risk tolerance, and financial objectives. On the other hand, people with a longer investing horizon and a willingness to tolerate market fluctuations find mutual funds appealing since they provide the possibility of bigger returns, able it at a higher risk. FDs are appropriate for people who value capital preservation and have short-term goals since they provide stability and security. Conversely, mutual funds are an adaptable instrument for diversification, wealth building, and maybe long-term return maximization. You can ensure your financial future by making an informed selection by carefully evaluating your goals and weighing the advantages and disadvantages of each option.

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