NPS vs Mutual Funds: Find which is better investment tool and why

NPS vs Equity Mutual Funds: National Pension System or NPS is one of the most preferred investment plan meant for retirement planning. However, if we go by the experts' advise, in an investment, risk appetite of the investor plays an important role while deciding, which investment tool is better suited for him or her. NPS is chosen by those who have an affinity for risk appetite but at a tepid level. If someone has a higher risk appetite, then he or she can directly invest in equity mutual funds or ELSS mutual funds. In NPS, an investor can expect around 10 per cent return post-retirement if the equity and debt ratio is 50:50. Though, in ELSS mutual funds, if someone invests for a similar period, one can expect at least 12 per cent returns on his or her investment. 

Speaking on how the NPS is different from mutual funds, Manikaran Singh, a SEBI registered tax and investment expert said, "NPS has eight fund managers where one can choose the equity option up to 60 per cent of his or her investment. And at the time of retirement, one can withdraw only 60 per cent of the maturity amount, which is tax-free. Rest 40 per cent would remain in the NPS account for next 20 years with the insurance company which is meant for pension funding of the investor and it would be taxable. But, in ELSS mutual funds, one can get 100 per cent of the maturity amount at the time of completion of the plan." Manikaran also added that in NPS, one can avail Income Tax exemption on up to Rs 50,000 investment under Section 80CCD while in ELSS mutual funds, one can avail income tax exemption benefit on up to Rs 1.5 lakh investment in a financial year under Section 80C.

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Comparing ELSS mutual funds with NPS; Kartik Jhaveri, Manager — Wealth Management at Transcent Consultants said, "Biggest flaw in NPS is 60 per cent withdrawal of the maturity amount post-retirement while in ELSS mutual funds, one can withdraw 100 per cent of his or her maturity amount. Since NPS fund managers also invest the 40 per cent balance in debt funds, it's better to invest in ELSS mutual funds and then re-invest some of the maturity amounts in debt funds post-retirement. However, it depends upon the risk appetite of the investor. ELSS mutual funds are advisable for only those investors who have the higher risk appetite."