Difference Between NPS and Mutual Funds

Most salaried individuals or those with a steady source of income want their money to do more than just sit idle in their savings account. While regular savings may cover immediate needs, they are rarely enough to build long-term wealth or ensure a comfortable retirement. That is where investment choices, such as the National Pension Scheme (NPS) and mutual funds, come into play. Among the many options available, NPS and mutual funds stand out for their popularity and the purpose they serve.

Table of Content

• What is NPS? 
• Key Features of NPS 
• What is a Mutual Fund? 
• Key Features of Mutual Funds 
• Key Differences: NPS vs Mutual Funds 

At first, both investment tools may seem like simple investment options on the surface. However, their objectives, structures and benefits are converse to each other. To make an informed decision, it is vital for individuals to understand what NPS and mutual funds are and how they stack up against each other in the NPS vs mutual funds debate.

What is NPS?

The National Pension Scheme or NPS, as it is popularly known, is a government-backed retirement savings scheme that provides financial stability after retirement. The investment approach encourages disciplined, long-term investing, where contributions are made regularly and invested across equity, corporate debt and government bonds depending on the allocation you choose.

Upon attaining retirement at the age of 60, a portion of your accumulated corpus (usually 40%) can be withdrawn as a lump sum, while the remainder is used to purchase annuities, ensuring a steady pension income.

Key Features of NPS

Focused Primarily on Retirement Planning

NPS is primarily designed to help individuals, including salaried and self-employed individuals, build a substantial retirement corpus. Unlike short-term savings options, NPS encourages regular and disciplined savings by contributing consistently until your retirement, when your earnings ultimately stop.

Government-Regulated and Secure

Being regulated by the Pension Fund Regulatory and Development Authority (PFRDA), the National Pension Scheme offers a level of financial cushion once you stop earning that few other investment options may not provide.

Attractive Tax Benefits

Investing in NPS undoubtedly helps build your retirement corpus, but it also helps reduce your tax liability. You can claim deductions up to INR 1.5 lakh under Section 80C, plus an additional INR 50,000 under Section 80CCD(1B), giving you a significant incentive to park your money constructively and consistently.

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What is a Mutual Fund?

Mutual funds can be defined as a pool of investments where money from different investors is collected and invested in a diversified portfolio of securities, such as bonds, stocks and often a combination of both. The funds invested are managed by professional fund managers; thus, it allows investors to access the benefits of diversification, market expertise and structured investment strategies without having to manage the portfolio themselves.

Depending on your financial risk appetite and investment horizon, mutual funds come in various categories, such as debt funds, equity funds, hybrid funds and index funds. Each type of mutual fund category caters to different needs, be it for short-term liquidity, long-term wealth creation or a mix of stability and growth.

Key Features of Mutual Funds

Diversified Investment Options

Mutual funds provide investors access to a wide range of securities, spreading their investment across multiple assets, such as stocks, bonds or a combination of both. This diversification reduces risk while allowing investors to tap into different market opportunities, which can be otherwise difficult to manage as an individual fund manager.

Professional Fund Management

Every mutual fund invested is managed by professional fund managers who make strategic investment decisions to invest your funds, based on market research, trends and economic forecasts. This professional management allows investors to benefit from expertise they might not otherwise have on their own.

Flexible Investment and Liquidity

Unlike NPS, mutual funds offer investors high liquidity, which means you can redeem your units when needed, making them a suitable investment option for short-term goals as well as long-term financial planning. The flexibility allows investors to adjust their investment portfolio as their financial needs change over the course of their investment tenure.

Tax Benefits

Certain mutual funds, like Equity Linked Savings Scheme (ELSS), provide tax benefits under Section 80C of the Income Tax Act, allowing you to save while investing. This makes mutual funds a dual-purpose tool for wealth generation and tax planning.

Key Differences: NPS vs Mutual Funds

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Ultimately, choosing between NPS and mutual funds is about aligning your investments with your goals. With decades of expertise and trust, Muthoot Finance offers avenues, such as NPS and mutual funds, to help you achieve your financial goals. The extensive branch network and digital platforms of Muthoot Finance enable you to manage your investments conveniently and secure a stable future.