NPS Tier II vs. Mutual Fund

Most people do not have clarity on which investment options suit their needs best between NPS Tier II vs. Mutual Fund^^. While NPS Tier II is tailored for retirement savings, Mutual Funds provide a broad spectrum of investment options catering to various financial goals. Understanding the distinctions between these two instruments is crucial for making informed investment decisions aligned with individual preferences and objectives.

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NPS Tier II Account

The NPS Tier II Account is a voluntary, flexible investment option offered under the National Pension System (NPS) in India. The National Pension Scheme (NPS) is a government-sponsored scheme managed by the Pension Funds Regulatory and Development Agency (PFRDA). 

The NPS Tier-2 account functions as a savings account, allowing you to deposit and withdraw funds at your convenience.

The NPS scheme offers you the following two investment accounts, making it a versatile choice for those seeking flexibility in their pension planning:

  • NPS Tier I

  • NPS Tier II

Overview of NPS Tier I and NPS Tier II Accounts

Some major features of NPS Tier 1 and NPS Tier 2 accounts are listed in the table below:

NPS Tier I Account NPS Tier II Account
Long-term retirement savings Voluntary savings for short-term goals
Mandatory for central government employees Open to all individuals, including non-government employees.
Restricted withdrawals before retirement Allows frequent withdrawals
Tax benefits under Section 80CCD(1) Tax benefits under Section 80CCD(1B) for additional contributions
Minimum annual contribution required No minimum contribution requirement
Suitable for retirement planning Suitable for both short-term and long-term financial goals
Limited investment options Offers a range of investment choices
Withdrawal restrictions ensure long-term savings discipline. Provides liquidity with easy withdrawal options
Designed for pension income post-retirement Primarily serves as an investment account with no compulsory annuity purchase.
Withdrawal is permitted only in specific circumstances Flexible withdrawals for various financial needs

Mutual Funds

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They offer a professionally managed and easily accessible investment option, providing you with the benefits of diversification, liquidity, and professional expertise. Mutual funds are regulated by the Stock Exchange Board of India (SEBI) and offer various types, including equity funds, bond funds, and hybrid funds. It helps in catering to different risk appetites and investment goals. 

People also calculate: NPS Pension Calculator

Features of Mutual Fund Schemes

  • Diversification: Mutual funds invest in a variety of investment instruments, which spreads the risk across different assets.

  • Professional Management: Fund managers make investment decisions in the mutual fund schemes, leveraging their expertise for optimal returns.

  • Liquidity: You can buy or sell fund units at the prevailing Net Asset Value (NAV) on any business day.

  • Flexibility: Various mutual fund types cater to different risk profiles and investment objectives.

  • Transparency: Regular reporting of NAV, holdings, and performance provides you with transparency.

  • Affordability: Investors with modest capital can participate in diversified portfolios through mutual funds.

  • Dividends and Capital Gains: Income generated by the fund is distributed to investors through dividends or capital gains.

  • Systematic Investment Plans (SIP): Mutual fund schemes allow you to contribute regularly through SIPs, promoting disciplined investing.

  • Tax Benefits: Certain mutual funds offer tax advantages, such as the Equity Linked Savings Scheme (ELSS), which is eligible for tax deductions under Section 80C and 10(10D) of the Income Tax Act, 1961.

Difference Between NPS Tier II vs. Mutual Fund

The key differences between mutual funds and NPS Tier 2 accounts are listed in the following table:

Aspect NPS Tier II Mutual Fund
Type Pension product Investment product
Objective Retirement savings Wealth creation and other goals
Regulation Regulated by PFRDA Regulated by SEBI
Lock-in Period Tier II has no lock-in period Varies based on the type of mutual fund
Withdrawals Flexible withdrawals allowed Subject to exit load and terms
Tax Benefits No tax benefits on contributions made to NPS. However, it offers tax benefits on premature withdrawals and the purchase of annuity plans. ELSS scheme offers tax benefits under Section 80C and Section 10(10D)
Risk Generally lower risk Risk varies based on fund type
Management Fees Relatively lower management fees Management fees vary
Investment Options Limited to debt and equity instruments A diverse range of asset classes
Portability Limited portability between NPS tiers There is no portability between funds
Target Audience Individuals planning for retirement Investors with varied financial goals

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

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NPS Tier- 2 vs. Mutual Fund: Which is Better?

You can decide the best investment option for you among the Mutual Fund vs. NPS Tier 2 account as per the following key considerations:

  1. Choose NPS Tier-2 if:

    • Retirement is Your Focus: Tier-2 offers tax benefits on withdrawal at retirement.

    • Lower Fees Appeal to You: Tier-2 has significantly lower expense ratios than most mutual funds.

    • You Have Long-Term Goals: Tier-2 allows up to 50% investment in equity for long-term growth.

  2. Choose Mutual Funds if:

    • You Need Flexibility: Funds offer easier access to your money with no lock-in.

    • Specific Goals Matter: Diverse fund options cater to various financial goals like child education or a vacation.

    • Higher Risk Appetite Drives You: Some funds offer higher equity exposure for potentially higher returns.

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.


  • Which is better, NPS Tier 2 or SIP?

    Choosing between NPS Tier 2 and SIP depends on your individual financial goals and risk appetite. If you are looking for a long-term investment with lower fees and tax benefits, NPS Tier 2 might be a better option. If you prefer flexibility, liquidity, and a wider variety of investment options, SIPs might be a better choice.
  • Is it better to invest in NPS or mutual funds?

    Choosing between NPS and mutual funds depends on your individual financial goals, risk appetite, and investment horizon.
    • For retirement planning, NPS is a better option due to its structured approach, tax benefits, and lower fees. 

    • For short-term goals or if you need flexibility with your investments, mutual funds are a better choice.

    • If you have a long-term investment horizon and are comfortable with moderate risk, you can consider investing in both NPS and mutual funds.

  • Is NPS Tier 2 better than hybrid mutual funds?

    Choosing Between NPS Tier 2 and Hybrid Mutual Funds:
    • If you prioritize low fees and tax benefits and want flexibility for partial withdrawals after 3 years, NPS Tier 2 might be a better option. 

    • If you desire a wider range of investment options, high liquidity, and the potential for higher returns, hybrid mutual funds might be a better choice.

    • For even greater diversification, you can consider investing in both NPS Tier 2 and hybrid mutual funds to benefit from both options.

  • What should I choose as the difference between Tier 2 and mutual funds?

    The choice between NPS Tier 2 and the mutual fund can be as per the following:

    Choose Tier 2 if:

    • You prioritize tax-efficient retirement planning.

    • You want the flexibility to withdraw funds anytime (but be prepared for potential penalties).

    • You are comfortable with a limited range of investment options.

    Choose Mutual Funds if:

    • You have specific investment goals beyond retirement.

    • You want greater flexibility in choosing investments across asset classes.

    • You prefer lower minimum investment amounts.

    • You prioritize higher liquidity.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
+Returns Since Inception of LIC Growth Fund
~Source - Google Review Rating available on:-
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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