Back to Blog
The National Pension System is a voluntary retirement scheme introduced by the Government of India, whereas mutual funds invest in stocks, bonds, and securities. However, they are designed for different objectives and come with different features. The NPS scheme is oriented towards providing financial security during the golden years of an investor, and on the other hand, mutual funds offer equity and debt-led investment options. What are the key differences between NPS and mutual funds, the advantages of NPS, and how to open an NPS account? We’ll uncover it in this blog.
National Pension System—What to look for & advantages?
With an aim to provide financial security during the retirement years, NPS investment is open to all citizens of India. NPS invests across various asset classes like equity, corporate bonds, government securities, and AIFs. NPS offers market-linked returns, and it is regulated by the PFRDA (Pension Fund Regulatory and Development Authority). It also has two types of accounts, Tier I and Tier II, respectively.
A Tier I account has a lock-in period till the subscriber reaches the age of 60. They can withdraw a certain accumulated corpus with some terms and conditions. However, the scheme offers flexibility in asset allocation through active choice and auto choice.
Whereas Tier II offers a voluntary investment account, just like mutual funds. Subscribers have the flexibility to invest and withdraw anytime they want.
Upon reaching the age of 60, subscribers can withdraw their accumulated corpus. Up to 60% of their corpus is tax-free, and the remaining 40% should be used to buy annuities to receive a regular pension.
NPS also provides tax deductions up to ₹1.5 lakh under Section 80(C). Additionally, it also offers ₹50,000 in tax deductions under Section 80CCD (1B), which is over and above Section 80(C).
Click here to learn more about NPS tax deductions.
NPS and Mutual Fund Returns Exposure
The National Pension System (NPS) offers a stable and disciplined approach to long-term wealth creation. While it is market-linked, NPS maintains a cap on equity exposure (up to 75% in Tier I accounts), ensuring controlled risk and reduced volatility, ideal for investors seeking consistent growth over time.
Historically, NPS has delivered good market-linked returns, maintaining a balance between growth and stability. Compared to mutual funds, which may offer higher return potential through aggressive equity allocation. However, NPS stands out for its structured asset allocation, tax efficiency, and retirement-focused discipline, making it a smart choice for those planning for financial security in their later years.
NPS vs. Mutual Fund—Which is better?
Subscribers can choose NPS if their primary goals are retirement planning, moderate returns, and tax savings. It is particularly aimed at salaried individuals seeking to build their retirement corpus.
Mutual funds offer flexibility, more diverse investment options, and have the potential to give better returns. Investors invest in mutual funds to achieve particular goals, such as child education or buying a car or home; some mutual fund categories also offer retirement funds.
Final Thoughts
Choosing between the right investment options depends on your goals, risk tolerance, and investment horizon. If a subscriber solely invests to save taxes and to build a corpus over time to secure their retirement years, then they may look up to NPS.
