NPS vs mutual fund SIP: Which is a better investment plan for retirement? | Explained

NPS vs mutual fund SIP: Investment is important to achieve financial goals at every stage of your life. When you are young, you create wealth to complete your short-term goals. At the same time, you invest for your old age to live a happy and financially secure life. But when you are financially planning for either stage of your life, it is important to choose the right investment options. The right choices will help you attain financial freedom soon. For investors seeking to achieve short-term goals and live a happy post retirement life, two popular options are- National Pension Scheme (NPS), and systematic investment plan (SIP) investments in mutual funds. The careful selection of either or both options can be helpful in creating wealth and achieving your financial goals. Here's your guide for the same-    

NPS Vs Mutual Fund SIPs

National Pension System (NPS)

1. Retirement-focused: NPS is designed primarily for retirement planning. NPS provides a more structured way to accumulate a retirement corpus by investing in equity, corporate bonds, and government securities.

2. Tax Benefits: Contributions towards NPS are eligible for tax benefits. NPS offers tax benefits under Section 80CCD(1B) for an additional deduction of up to ₹50,000 over and above the limit of Rs 1.5 lakh under Section 80C. 

3. Regulated by PFRDA: NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), and provides flexibility in choosing fund managers and investment options.

4. Lock-in and Withdrawals: NPS has withdrawal limitations. The NPS lock-in period is till the investor turns 60. However, premature withdrawal is also possible, but with certain restrictions for specific purposes like child education, buying a house, etc.

Mutual Fund SIPs:

1. Diverse Investment Choices: Mutual Fund SIPs offer a wide range of investment choices across numerous asset classes such as equity, debt, hybrid, and others, catering to various financial goals beyond just retirement.

2. Lock-In Period & Withdrawals: Mutual Fund SIPs offer various lock-in-periods, allowing investors to redeem their investments whenever needed.

3. Taxation: Taxation on mutual funds varies depending on the type of fund and the holding period. Equity-oriented funds have different tax implications compared to debt-oriented funds.

4. Professional Fund Management: Mutual funds are managed by professional fund managers who make investment decisions based on market conditions and fund objectives and are regulated by the market regulator, Securities and Exchange Board of India (SEBI).

NPS vs Mutual Fund SIP: The choice between both, which is better?

Mayukh Datta, CBO at ITI Mutual Fund, said, “A balanced approach that could involve a combination of both NPS and Mutual Fund SIPs to meet various financial objectives is ideal."

NPS vs Mutual Fund SIP: Which factors should one consider while making the choice?

Nitin Shahi, Executive Director at Findoc Group, said, "The choice between NPS and mutual fund SIPs ultimately depends on individual financial objectives, risk tolerance, and investment horizon. For investors prioritising retirement planning with tax benefits, NPS serves as an efficient tool. Conversely, mutual fund SIPs offer flexibility, diversification, and the potential for higher returns over the long term, making them suitable for wealth creation and financial goals beyond retirement."

Notably, it is advisable to consider consulting a financial advisor who can assess your circumstances and help you make an informed decision based on your financial goals and risk tolerance.

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