NPS scheme vs equity Mutual funds: Which is better? Explained with ten points

NPS vs equity mutual funds: Both Equity Mutual Funds (MFs) and the National Pension System (NPS) are tools to create wealth in the long term. The choice between NPS and equity MFs depends on various factors, including your financial goals, risk tolerance, investment horizon, investment preferences, and tax benefits. Both NPS and equity mutual funds have their advantages and disadvantages.

1)NPS vs equity MF: Purpose 

NPS is a long-term retirement-focused investment vehicle designed to provide a regular income stream after retirement. Mutual funds serve various financial goals, including wealth creation, retirement, and tax planning depending on the objective of the scheme selected. Options are available for short to long-term investment horizons.

2) NPS scheme vs equity mutual funds: Investment Options

NPS Tier 1 provides a diversified array of asset classes, encompassing equity, corporate bonds, government securities, and alternative investment funds. Investors have the flexibility to select from various investment options: Active Choice, enabling self-allocation, or Auto Choice, which allocates based on age.

Equity investments within NPS Tier 1 are directed solely towards the top 200 stocks of the equity capital market, sorted by market capitalization. Equity mutual funds, on the other hand, encompass a broad spectrum of asset classes, including equity, equity arbitrage, and debt instruments, thereby constituting hybrid equity funds.

In compliance with regulations, equity mutual funds are mandated to allocate a minimum of 65% of their assets into equity and equivalent securities. These funds may adopt passive or active management strategies, with allocations diversified across sectors/themes and market capitalization segments.

3) Volatility

“NPS is more secure and less volatile as they diversify funds across Equity, Corporate bonds, and government securities, whereas Equity Mutual Funds invest most of the funds under equity only,” said Ravi Singhal, CEO, of GCL Broking.

4) Tax treatment 

Kurian Jose, CEO, of Tata Pension Management said,"NPS enjoys Exempt – Exempt – Exempt (EEE). Tax exemption upon investment, tax exemption on capital appreciation, and tax exemption on 60% of the pension corpus and for buying the annuity product with a minimum of 40% of the NPS corpus. Only Equity Linked Savings Scheme (ELSS) Mutual Funds can benefit from tax exemption."

5) NPS vs equity MF: Tax benefits

“NPS is a government-sponsored pension fund, which is generally used for pension planning and tax saving under section 80 CCD 1(B) up to 50k per year, whereas  Equity Mutual funds are SEBI-regulated schemes, which generally invested for a specific financial goal and tax saving under section 80C up ₹1.5 lakh (in case invested in ELSS schemes),” said Ravi Singhal, CEO, of GCL Broking

A further deduction of up to ₹50,000 under Section 80 CCD (1B) of the Income Tax Act exclusively for NPS investments.

"Further, subscribers under the Corporate NPS model can get additional tax benefits under section 80CCD (2) of the Income Tax Act on investment up to 10% of Basic Salary. This benefit is capped at ₹7.5 lakh (including PF, Superannuation fund and NPS). Only Section 80CCD (2) benefit is available under the new tax regime. Whereas all the other 3 exemptions as mentioned earlier are available under the old tax regime. ELSS mutual funds can get benefits of up to ₹1.5 lakh under Section 80 CCD (1) of the Income Tax Act, said Kurian Jose.

“Short-term capital gains on equity MFs – 15%; Long-term capital gains on equity MF – 10%,” added CEO, of Tata Pension Management.

Also Read: Reliance to HDFC Bank — here are the top five stocks held by National Pension System equity funds

6)Lock-in Period

NPS Tier 1 investment has a lock-in period until retirement (with some pre-conditions for partial withdrawals). Except for ELSS Mutual funds which have a lock-in of 3 years, most equity mutual funds do not have a lock-in period.

7) Regulation 

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) Mutual funds are regulated by the Securities and Exchange Board of India (SEBI)

8) Change of fund manager

Pension Fund Manager change can be done once every financial year without tax incidence. Any change between Mutual Funds is taxable.

9) Exit

“40% of the NPS Tier 1 Corpus has to be utilised to purchase an annuity from an annuity service provider. The remaining 60% can be withdrawn after attaining the age of 60 without any tax incidence  However, mutual funds may have an exit load,” said Kurian Jose.

10) NPS scheme vs equity mutual funds: Returns

As risks are high, equity mutual fund offers more return in the long term. “NPS schemes generally offer 10-12% returns, whereas Equity Mutual funds offer 14-16% return in the long-term. So, one has to choose as per their risk appetite and investment objective,” said Ravi Singhal, CEO, of GCL Broking.

NPS and Equity Mutual Funds each possess distinct fee structures, lock-in periods, exit loads, investment strategies, and tax benefits. Hence, individuals considering investment should thoroughly review scheme-related documents or seek guidance from their investment advisor beforehand.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.