Which is better Retirement Tool : NPS or Equity Mutual Funds

Planning for your retirement!

Retirement is an end to the daily struggle for the salaried persons. If you take a pension plan, you will be financially independent and free in this beautiful phase of life even if there is no incoming salary.

Thus, Retirement planning is an important part of your personal money management and with all the investment options.

Some investment experts believe that individuals should now seriously consider investing in the `new tax-friendly’ NPS to fund their retirement. That has revived the old question once again: Should you invest in NPS or Mutual Funds to build your retirement corpus?

NPS is similar to a mutual fund scheme as both pool assets from a number of investors and assign or allot units as investment value in a fund. The money which is collected gets invested in assets as per the allocation mentioned for a particular scheme. This portfolio is then managed actively by a fund manager who endeavours to grow your money over time and give a reasonable return in the long term.

As mandated in NPS, at the time of retirement, 60% of the accumulated corpus can be withdrawn tax-free and the balance 40% has to be invested into an annuity. However NPS has the provision to give you a higher tax deduction of up to Rs 2 lakh under section 80C as compared to ELSS where one can avail income tax exemption benefit on up to Rs 1.5 lakh investment in a financial year.

Hence, NPS has greater tax benefits compared to equity mutual funds where long term gains are taxed at 10% on withdrawal. And Of course, NPS being a very low cost product could result in better returns than equity mutual funds.

Limitation:

But the limitation of having a portion of the retirement corpus to be commuted into an annuity is a big negative for NPS.

Remember in NPS you cannot redeem your entire investment before reaching 60 years. You can only withdraw 20% of the corpus if you want to get out of the scheme before you are 60 years old. You must compulsorily buy annuity with the remaining 80% of the corpus. Hence, you don’t have flexibility in your investment.

So, the fact remains that for most people to choose the right mutual funds and sticks to disciplined investing in equity mutual fund, where you have funds which are more liquid and flexible. Also, you can decide how to use your mutual fund corpus at the time of retirement based on the circumstances. You don’t have to compulsorily settle for annuity that will pay you poorly.

Difference between NPS and Equity Mutual Funds:

Given their similarities and differences, you should make a wise choice between both the investment options depending upon your financial objectives and use flexibility to build the retirement corpus that suits you best. 

To know more 

You can use GIIS Financial tools or Our Android App  for Investment, tracking and Asset allocation planning. 

Share On