NPS vs Mutual Funds

What Is NPS?

National Pension Scheme, popularly known as NPS, is an investment option designed for investors looking to save up for their retirement. Earlier, this scheme was only for government employees, but it has now been extended to individuals working in both private and public sectors.

How Does NPS Work?

A working professional invests a fixed amount of their salary towards NPS until they reach the retirement age. The invested amount is then invested in securities such as bonds, equity and corporate debt. You can manually choose which assets your money will be invested in, or let the system allocate the assets according to your age.

As you get older and near retirement, NPS reduces your risk exposure by investing in low-risk investments. At retirement, the investors will get the capital and the returns earned on it, which can be withdrawn entirely or in fixed monthly payouts. The return on investment depends on the asset mix and typically ranges from 9-12% annually.

Contributions made to NPS are deductible under Section 80CCD(1) and Section 80CCD(1B) of the Income Tax Act, making withdrawals partly tax-free.

What Are Mutual Funds?

In mutual funds, money is collected from many investors and invested in a wide range of securities such as stocks, bonds, commodities, etc. The investments are market-linked, meaning if the market falls, the value of your mutual fund investments will fall.

There are different types of mutual funds you can invest in based on your financial goals and risk tolerance.

There Are Three Main Types of Mutual Funds:

• Equity Mutual Funds

This fund invests predominantly in stocks of listed companies on the stock exchanges. Due to the volatile nature of the equity, equity mutual funds are considered high-risk and high-return investments.

• Debt Mutual Fund

This fund invests in debt instruments such as government securities, bonds and money market instruments and hence carries low risk and offers low returns.

• Hybrid Mutual Fund

This fund invests in equity and debt in a predetermined portion. It involved moderate risk due to its balanced asset allocation.

How Do Mutual Funds Work?

The money pooled from various investors is managed by experienced fund managers, have a good track record of profitable investment with risk management and market analysis skills.

The fund manager invests this collected fund into stocks, bonds and commodities, et,c based on investment objectives. As a mutual fund investor, you get a fractional ownership of the assets that the mutual fund invests in. When you invest in mutual funds, you get mutual fund units instead of shares and the price of these units is referred to as NAV (Net Asset Value).

Since mutual fund investments are market-linked, the NAV of mutual fund units fluctuates, reflecting the changes in prices of the underlying assets. If the stock market rises, the NAV rises, whereas if the stock market falls, the NAV of units will also fall.

Comparing NPS vs Mutual Funds

Both NPS and mutual funds are good investment options with different structures and purposes. Here’s a detailed comparison of both investments.