NPS Tier II Account vs. Mutual Funds

NPS Tier II Account

The National Pension Scheme (NPS) is part of the scheme launched by the Government of India in 2004. It is managed by the Pension Funds Regulatory and Development Agency (PFRDA). 

The scheme provides an opportunity to the client in the 18-60 age groups to create a retirement fund to live a worry-free retirement life. NPS schemes help do that.

The scheme allows the customer an option to invest in Tier I or even both plans at the same time: 

• Tier I – The account under the SBI NPS scheme does not allow the customer to withdraw any amount invested. This is a mandatory account and offers tax benefits to the account holders. 

• Tier II – The account can only be opened by investors who already have a Tier I account. The consumers are allowed to withdraw funds from this voluntary account. 

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Features of an NPS Tier-II Account

Some major features of NPS Tier-II Account are:

• Voluntary account: The National Pension Scheme Tier II account is not mandatory. However, to open the account, members must have a Tier I account. 

• Contribution amount: The minimum account balance when the new NPR Tier II account is opened is Rs 1000. 

• Tenure: There is no lock-in period for the Tier II accounts. There is an option for the government employees to claim tax benefits from the scheme if they have kept their investments for a minimum of 3 years.

• Withdrawal: There is no withdrawal restriction if the account holder wishes to withdraw funds. They have the option to take out all the funds sitting in the Tier 2 NPS account as a lump sum or multiple instalments. 

• Taxation: Investments made in Tier-II NPS account are not eligible for any tax benefit. The withdrawals are part of the customer's total taxable income and are taxed as per the client's individual income tax slab.

• Transfer: The clients have an option to transfer funds from Tier II to Tier I accounts.

Mutual Funds

There are many misconceptions about mutual funds and its use. The financial risks associated with mutual funds make people sceptical. A mutual fund collects money from all the sources and invests it in different securities. 

They are beneficial for beginner or individual investors to allow their funds to be professionally managed at a low price. The total amount can be allocated into different categories depending on the type of security, the investment objective and the type of returns sought. 

Types of Mutual Funds

Equity Funds: According to the Investment Company Institute (ICI), Equity funds comprise more than 50% of the mutual funds. They have a higher potential to grow but are also volatile. The funds can be sliced into different categories depending on the goals and size of the fund. 

• Large-Cap Fund

• Mid-Cap Fund

• Small-Cap Fund

Debt Funds: A debt fund is a mutual fund that invests in fixed income instruments. The fund investment can be in government and corporate bonds, corporate debt securities, etc.

Balanced Funds: Balanced Funds are a combination of equity and fixed-income funds with a fixed ratio of investments, forex: 70% stocks and 30% bonds

Bond Funds: As the name suggests, bond funds are the most common type of fixed-income mutual funds, where the investors are paid some amount back on their initial investment after a specific time. 

The second most common type of mutual funds usually invests in government and corporate debt. This is considered to safer investment and has less potential to grow as compared to Equity funds.

Money Market Funds: As per ICI, the Money Market Funds comprise of 15% mutual funds market and investors generally invest in high-quality, short-term debt from the government, banks, or corporations

Difference NPS Tier II and Mutual Funds

*Tax benefit is subject to changes in tax laws. Standard T&C apply.

In Conclusion

In investments, one criterion does not fit all. Everyone has different goals, objectives, and investment capacities. For a capital growth goal, equity mutual funds are a better option. 

NPS should be your choice if you are planning to create a retirement corpus with regular investments over the long term. You should be careful before making these decisions and should do intense research before investing in any scheme.

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