NPS vs Mutual Fund

NPS vs Mutual Fund are two commonly considered investment options when planning one’s financial strategy. NPS is a government-backed retirement savings scheme designed for disciplined, long-term planning. Mutual funds, in contrast, are flexible market-linked investments that cater to a wide range of goals from short-term needs to long-term wealth creation. Let’s explore NPS vs Mutual Fund differences, taxation, and suitability so you can make an informed choice based on your goals, risk appetite, and investment style.

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What is the National Pension Scheme (NPS)?

The National Pension Scheme (NPS) is a government-sponsored retirement savings scheme that ensures financial security in later years. It was introduced by the Government of India in 2004. Initially, it was launched for government employees but was gradually extended to all citizens of India by 2009. Under NPS, individuals contribute regularly during their working years. The accumulated corpus is invested in a mix of equities, government securities, and corporate bonds. Investors can either choose the auto option, where allocation is decided based on age, or the active option, which allows them to decide their own asset mix.

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  • Mutual Funds
Returns
Fund Name 5 Years 7 Years 10 Years
High Growth Fund Axis Max Life
Rating
 28.6% 21.1%
17.8%
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India Consumption Fund Tata AIA Life
Rating
 26.65% 20.83%
20.1%
View Plan
Accelerator Mid-Cap Fund II Bajaj Allianz
Rating
 20.38% 12.4%
14.97%
View Plan
Opportunities Fund HDFC Life
Rating
 21.72% 14.49%
14.67%
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Opportunities Fund ICICI Prudential Life
Rating
 20.06% 13%
12.83%
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Multiplier Birla Sun Life
Rating
 22.25% 14.42%
15.78%
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Virtue II PNB MetLife
Rating
 20.99% 16.04%
15.13%
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Equity II Fund Canara HSBC Life
Rating
 16.71% 9.95%
10.99%
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Balanced Fund LIC India
Rating
 10.6% -
-
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Equity Fund SBI Life
Rating
 16.87% 11.68%
12.1%
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Fund rating powered by
Last updated:
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  Returns
Fund Name 3 Years 5 Years 10 Years
Active Fund QUANT 23.92% 31.48%
21.87%
Flexi Cap Fund PARAG PARIKH 20.69% 26.41%
19.28%
Large and Mid-Cap Fund EDELWEISS 22.34% 24.29%
17.94%
Equity Opportunities Fund KOTAK 24.64% 25.01%
19.45%
Large and Midcap Fund MIRAE ASSET 19.74% 24.32%
22.50%
Flexi Cap Fund PGIM INDIA 14.75% 23.39%
-
Flexi Cap Fund DSP 18.41% 22.33%
16.91%
Emerging Equities Fund CANARA ROBECO 20.05% 21.80%
15.92%
Focused fund SUNDARAM 18.27% 18.22%
16.55%

Last updated: August 2025

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Key Benefits of NPS

The National Pension Scheme is particularly beneficial in the following cases:

  • Retirement Planning Focus: NPS is tailored for individuals prioritising structured, long-term savings specifically for retirement security.

  • Balanced Risk Exposure: Offers equity allocation that gradually reduces, keeping risk moderate while maximising long-term returns.

  • Tax-Efficient Savings: Salaried and self-employed investors enjoy additional deductions, enhancing retirement wealth through efficient tax planning.

  • Long-Term Commitment: NPS restricts premature withdrawals, promoting disciplined savings without liquidity access until reaching retirement age.

What are Mutual Funds?

A mutual fund pools capital from multiple investors and invests it in a diversified portfolio of securities, including equities, bonds, and other financial instruments. Professional fund managers strategically determine the investment allocation in alignment with the fund’s stated objectives. There is a wide range of mutual funds available to suit varying investment objectives. You can pick funds for short-term, medium-term, or long-term goals and tax-saving funds like ELSS. 

Key Benefits of Mutual Funds

Mutual funds are suitable for a wide range of investors, offering flexibility and accessibility across different financial goals. They are especially beneficial in the following situations:

  • Flexible Investment Options: Mutual funds allow goal-based investments with multiple schemes tailored to diverse financial objectives.

  • Risk Tolerance Matching: Investors can choose funds based on comfort with risk, ranging from conservative debt to aggressive equity.

  • Easy Liquidity: Mutual funds provide convenient redemption, ensuring investors can access funds quickly when needed.

  • Small Investment Amounts: Investors can start with the best SIP Plans or lump sums, making mutual funds accessible to everyone.

  • Higher Return Potential: Mutual funds offer scope for higher returns and flexibility to switch investment strategies.

NPS vs Mutual Funds: Key Differences

NPS and mutual funds are popular investment options, but they serve different purposes and suit different investor needs. The key differences are as follows:

NPS Mutual Funds
The goal of the NPS is to help people save for retirement. Different types of mutual funds can help you reach your short-term, medium-term, or long-term financial goals.
The National Pension Scheme (NPS) permits investments primarily in equities, government bonds, corporate debt instruments, and select alternative assets. There are many types of mutual funds, such as equity, debt, hybrid, thematic, and foreign funds.
Tier-I NPS funds are locked in until the account holder turns 60. There is no lock-in time for most mutual funds, but there is one for ELSS funds that lasts for three years.
The Pension Fund Regulatory and Development Authority (PFRDA) oversees NPS. The Securities and Exchange Board of India (SEBI) oversees mutual funds.
The risk of an NPS is lower because the amount of stock exposure is limited and goes down as the member old. There are different types of mutual funds, each with a different level of risk.
In general, NPS has fewer and more stable fluctuations. Mutual funds can be risky depending on the type of assets they hold. Equity funds are usually more volatile.
When the NPS account matures, 60% of the corpus can be taken tax-free, but the other 40% must be used to buy an annuity. Investors in mutual funds can get their money back at any time, but they may have to pay exit loads and fees.

NPS vs Mutual Funds: Tax Implications

The tax treatment of mutual funds is more flexible than NPS but varies by fund category, holding period, and the evolving tax regime. Here’s how it works:

NPS Mutual Funds
The National Pension Scheme (NPS) offers significant tax benefits to investors. Contributions to a Tier I account are eligible for deductions of up to ₹1.5 lakh under Section 80CCE, along with an additional deduction of ₹50,000 under Section 80CCD(1B). Mutual funds, particularly Equity Linked Savings Schemes (ELSS), offer tax-saving benefits under Section 80C of the Income Tax Act with deductions of up to ₹1.5 lakh and a mandatory three-year lock-in.
Dividend income from mutual funds is taxed at the investor’s slab rate. Tax Deducted at Source (TDS) at 10% applies only if annual dividends exceed ₹5,000. STT is also levied on redemptions and sales of equity-oriented funds.
Currently, only Tier I accounts qualify for tax benefits, while Tier II accounts do not. The National Pension Scheme (NPS) Tier-II Tax Saver Scheme is available only to Central Government employees. It provides tax benefits under Sections 80C/80CCE with a mandatory three-year lock-in period. For all other subscribers, Tier-II NPS accounts do not offer any tax benefits. The taxation of gains depends on the type of fund and holding period. For equity-oriented mutual funds, long-term capital gains above ₹1.25 lakh (holding period over 12 months) are taxed at 12.5% on transfers made on or after 23 July 2024; gains from transfers before this date are taxed at 10% above ₹1 lakh.
At maturity, up to 60% of the accumulated corpus can be withdrawn tax-free, while the remaining 40% must be used to purchase an annuity, the income from which is taxable as per the investor’s applicable income tax slab. For debt-oriented or specified mutual funds (where equity allocation is 35% or less), gains on units acquired on or after 1 April 2023 are treated as short-term and taxed at the investor’s applicable slab rate. Investments made earlier may still qualify for long-term capital gains with indexation benefits at 20%. From FY 2025-26, such gains will be taxed at 12.5% without indexation.

NPS vs Mutual Fund Which is Better?

The decision between NPS and mutual funds depends on your life stage, financial goals, risk tolerance, and liquidity needs. Here’s how you can decide accordingly:

  • Young Investors (20s–30s): Go with NPS to build a retirement base and claim tax benefits, while also investing in equity mutual fund SIPs for wealth creation.

  • Mid-Career (40s): Increase NPS contributions to strengthen your retirement corpus. At the same time, maintain a balanced mutual fund portfolio (equity and debt) for medium-term goals such as children’s education or housing.

  • Pre-Retirement (50s): Prioritise stability. Shift mutual fund investments toward hybrid or debt funds to reduce volatility. Maximise NPS contributions to secure tax benefits and ensure a steady post-retirement income stream.

  • Overall Strategy: The most effective approach is often to invest in both for retirement security and tax efficiency. It is always helpful to consult a financial advisor or your mutual fund manager for better clarity.

Key Takeaways

The choice between NPS vs Mutual Funds depends on one’s investment horizon, financial objectives, and risk tolerance. With its stable returns and tax advantages, NPS serves as an effective instrument for disciplined, long-term retirement planning. In contrast, mutual funds provide a broader spectrum of investment opportunities and the potential for higher returns to achieve diverse financial goals. You can start SIP in Best Mutual Funds in India and begin building long-term wealth.

FAQs

  • Which is better, NPS or PPF?

    NPS invests in a mix of stocks and bonds, making it suitable for investors seeking higher returns and willing to accept moderate risk. PPF, on the other hand, is better for risk-averse investors who prefer guaranteed returns. The choice depends on your risk tolerance and financial goals.

  • Is a mutual fund better than NPS?

    Both serve different purposes. NPS is designed for long-term retirement planning with tax benefits, while mutual funds provide flexibility and potential for higher growth across diverse financial goals. The right option depends on your investment objectives and risk profile.

  • What is the disadvantage of NPS?

    While NPS offers tax benefits, withdrawal rules can be restrictive. At retirement, up to 60% of the corpus is tax-free, but the remaining 40% must be used to purchase an annuity, which is taxable.

  • Is SIP possible with NPS?

    Yes, investors can contribute to NPS through systematic investments, similar to a SIP. This approach helps build a retirement corpus gradually while also availing tax benefits.

  • Is NPS 100% safe?

    NPS is regulated by the government and considered low-cost and secure. However, since part of the funds is invested in equities and bonds, returns are market-linked and not entirely risk-free.

  • Is NPS worth investing in?

    Yes, NPS is a worthwhile option for disciplined retirement planning. It offers tax benefits, long-term wealth creation, and stable post-retirement income, making it especially suitable for conservative investors.

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^^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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