NPS or mutual fund which is better?

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 Working people may decide to invest in NPS as a way to lock in their money for a secure retirement. Mutual Funds, on the other hand, are open-ended, well managed investment vehicles that aggregate money from numerous investors to buy securities. Both, however, are investment programmes with a market component.

In the event that they opt to invest via SIP for the long term, investors may pool their funds into Mutual Funds and the National Pension System at predetermined, regular intervals. It should be highlighted that many investors mistakenly utilise SIPs and mutual funds interchangeably. SIPs (Systematic Investment Plans) are a method of investing in mutual funds, however (that are an investment option for investors). 

Before deciding where and how to invest, it is crucial that you are aware of all of your alternatives. Let's first examine two types of personal investment: mutual funds and the National Pension System.



What is NPS?

The National Pension System, a retirement programme for the financial security of personnel in the public sector, was introduced in January 2004 as a social security initiative by the federal government. The programme was eventually made available to all working professionals by the year 2009. NPS is well-liked as a retirement plan and for the associated tax advantages.

Features of National Pension System

  • As of right now, the National Pension System permits workers in the public, private, and unorganised sectors to make regular contributions to a pension account up to the end of their job.

  • Depending on your risk profile, 50% to 75% of investments placed in NPS are exposed to equities. Given the cap, after the investor becomes 50 years old, the equity exposure of their investment will decrease by 2.5% a year. In the investor's best interest, this balances out the risk-return relationship.

  • To ensure a steady income even after retirement, employees might take a portion of their corpus out in a lump payment and invest the remainder in annuities.

  • No matter their job profiles, job types, or geographic locations, all employees are eligible for the programme. However, those who work for the military are unable to profit from this programme.

  • Returns from NPS typically outpace those from PPF investments.

  • Based on the scheme's historical performance, it has typically produced 8% to 10% returns per year.

  • When adjusting your risk exposure to asset classes, you can do so either actively or passively.

Advantages of Investing in NPS

  • Because NPS is supported by the government, investing in it carries extremely little risk.

  • One of the most secure investing opportunities is NPS

  • NPS satisfies investors' needs for long-term investments.

  • Under Section 80C and Section 80CCD of the Income Tax Act, the plan provides tax benefits.

  • Of the seven available funds, NPS is thought to be the only one that permits you to switch your fund manager once a financial year.

  • The four asset types that NPS investors invest in are equity, corporate debt, government bonds, and annuities. Because NPS investments are exposed to a variety of instruments, the risk is dispersed, which lowers the risk of volatility in the equity market.


What are Mutual Funds?

A mutual fund is a collection of several financial instruments that produce returns over an extended period of time. AMCs engage qualified experts known as fund managers to carefully administer investor funds and adjust allocations in response to market movements.

Types of Mutual Funds

Mutual funds can be broadly divided into the following 3 groups based on how their assets are distributed:

  • Equity Mutual Funds: In these funds, company equity stocks account for more than 70% of the assets. In the long run, equity mutual funds are thought to provide strong returns and growth opportunities.

  • Debt mutual funds: Government securities and other fixed-income instruments make up the majority of the assets in these funds. Mutual funds that invest in debt are known to have less risk and have set maturity dates.

  • Hybrid Mutual Funds: These funds are well known for investing in a variety of debt and equity fund securities. Combining the advantages of both, hybrid mutual funds often offer strong returns from equity investments and low risk from debt investments.

Modes of Investing in Mutual Funds

It should be mentioned that while investing in mutual funds, investors can choose between making a lump payment or a series of smaller investments, depending on their comfort level.

  • Systematic Investment Plans, also known as SIPs, are a service provided by fund companies that allow you to invest your corpus in mutual funds at predetermined, fixed intervals. This spares investors the strain of having to combine all of their savings at once. 

  • On the other hand, investors who choose the lump sum style of investing must combine the corpus at once. Lump-sum mutual fund investments do not let investors to adjust their invested amount during the investment period.

Features of Mutual Funds 

  • With as little as Rs. 500, one can begin investing in mutual funds (through SIPs).

  • Instead of having to pool large sums of money at once, investors can opt to invest in mutual funds at predetermined periods on a weekly, monthly, quarterly, or annual basis.

  • SIP payments for mutual funds must be made at regular intervals, which instills in investors a sense of accountability and dependability.

  • Investors have the flexibility to increase or decrease the capital they have invested based on their income.

  • As an illustration, the top-up option in SIPs enables investors to increase their SIP amount by a predetermined amount at predetermined intervals, increasing their gains.

Advantages of Mutual Funds

  • Due to the idea of rupee cost averaging, investors with long-term investment goals can benefit from their investments in mutual funds (in SIP investments)

  • Another element that helps investors profit from their investments in mutual funds is the power of compounding. This guarantees that investors win from both the primary investment and the gains on the principal investment.

  • Compared to the interest gained on traditional investment strategies, such as FDs, for example, mutual funds offer higher returns that effectively combat inflation.

  • Mutual funds are regarded as a flexible kind of investing because they let investors easily add to or subtract from their corpus.

  • Additionally, certain mutual funds provide investors with tax advantages. For instance, under Section 80C of the Income Tax Act, investments made in ELSS (Equity Linked Savings Scheme) are tax-exempt up to Rs. 1.5 lakh.

NPS or Mutual Funds- What is a better investment option?

Both NPS and Mutual Funds help you develop financial discipline in your life when it comes to picking amongst the available investment options because the money is automatically deducted from your registered account at predetermined intervals (especially if invested via the SIP mode).

Because of their degree of flexibility, mutual funds frequently serve as emergency funds as well. You may decide to take your money out (with no or some exit load based on the scheme). Therefore, investing in NPS is advised if your aim is retirement, combined with tax benefits, and you have a low risk tolerance.

Additionally, you can reduce your tax liability during the course of your employment because Section 80CD of the Income Tax Act allows you to deduct up to Rs. 1.5 lakh from your taxable income for contributions to the NPS made by both you and your employer. Additionally, you may deduct any further self-contributions (up to Rs. 50,000) made to the plan under Section 80CCD as an NPS tax benefit.

Additionally, NPS was included in the 2019 budget's EEE (Exempt-Exempt-Exempt) category. This indicates that NPS members may deduct their NPS payments from taxes, that NPS returns are tax-exempt, and that NPS now qualifies as an Exempt-Exempt-Exempt (EEE) category product due to the tax advantages given to lump sum withdrawals. Contrarily, both short-term and long-term taxes are applied to capital gains in mutual funds.

Based on your financial goals and their similarities and differences, you should choose wisely between the two investing options. NPS should be your choice if your major investing goal is to financially secure your retirement. Mutual funds are typically preferred by people with strong risk appetites, short-term financial objectives, and other objectives.

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