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Mutual fund vs National Pension Scheme

Siddhi Sharma
/ Categories: Knowledge, MF
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Mutual fund vs National Pension Scheme

Let’s look at two different avenues that investors may consider for their retirement planning: 

Financial planning is a vital part of one’s life. Without an adequate financial plan, one can get suppressed under the burden of expenses and EMIs, which might lead to considerable financial stress.  

Retirement planning is a crucial section of financial planning, which is mostly ignored by people. Retirement planning might be confusing as it requires a well-thought-out plan.  

Let’s look at two different avenues that investors may consider for their retirement planning: 


National Pension Scheme (NPS)  

Mutual Fund   


National Pension Scheme is regulated by Pension Fund Regulatory & Development Authority (PFRDA). It is a good retirement option for employees working for the government, private or unorganised sectors. NPS can be subscribed by any citizen of India.  

A mutual fund is regulated by Securities Exchange Board of India (SEBI). These are professionally managed funds, which pool capital from investors and allocate the same across various asset classes. Mutual funds create alpha for their investors by actively managing investments of the investors.  


Tier I- This is a non-withdrawable account up to the age of 60 i.e., retirement age, in which, your deposits will be deposited.  


Tier II- This is a voluntary savings account, which you can deposit as well as withdraw at any point. You cannot open a tier-II account without a tier I account.  

Swavalamban account- This type of NPS is provided for encouraging poor workers. Under this scheme, Govt of India pay Rs 1,000 per year for 4 years of contribution.  

Equity-oriented schemes- This scheme invests a higher proportion of investments towards equity and equity-related instruments. This scheme contains a higher risk.  

Debt-oriented schemes- This scheme invests a higher proportion of investments towards debt and money market instruments. This scheme comes with lower and moderate risks.  

Hybrid schemes- This scheme invests in both equity as well as debt as per the pre-determined ratio by the asset management company.  

All other schemes rotate around the above-mentioned schemes.  


Low as compared to mutual funds and direct equity. 

High as compared to NPS. 

Lock-in period  

The lock-in period for tier I accounts is higher. You cannot withdraw before the age of 60. On the other hand, tier II accounts can be withdrawn anytime.  

Open-ended mutual funds don’t have any lock-in period. They can be withdrawn at the discretion of the investor. However, closed-ended funds have lock-in periods that differ according to the type of scheme.  


Before the age of 60: 20 per cent lumpsum and the remaining 80 per cent compulsorily has to be used to purchase an annuity.  

Beyond the age of 60 or at age 60: 60 per cent lumpsum and the remaining 40 per cent has to be used to purchase an annuity.  

In case of death: 100 per cent of the corpus will be available to the nominee  

There are no regulatory implications related to the withdrawal of mutual fund investments.  

Tax benefits  

1. Amount of deduction u/s 80CCD (1) is 1,50,000, which is a part of section 80C.  

2. The maximum deduction that one can claim is:  

Salaried employees-   

• Employees contribution, or   

• 10 per cent of salary, whichever is lower.  

Other individuals-  

• Assessee’s contribution,   or  

• 20 per cent of gross total income, whichever is less.  

3. Deduction u/s 80CCD (2), which does not form part of sec 80C, cover employers’ contribution towards NPS. This cannot be claimed by self-employed individuals.  

The deduction will be as follows:   

• 10 per cent of basic pay + dearness allowance  

• 14 per cent where contribution by the central govt as an employer.   



Equity-oriented schemes:  

Long-term capital gain: Capital gain arising after one year will be exempted up to 1 lakh and the amount exceeding 1 lakh will be taxable at the rate of 10 per cent.  

Short-term capital gain: Capital gain arising within 1 year will be taxable at the rate of 15 per cent.  

Equity-linked savings scheme (ELSS): It is eligible for tax deduction u/s 80C. 

Debt-oriented schemes:   

Long-term capital gain:  

Capital gain arising after 3 years will be taxed at the rate of 20 per cent.  

Short-term capital gain:  

Capital gain arising within 3 years will be taxable as per the Income Tax slab rates.  

Hybrid schemes:   

The proportion of equity and the equity-related instrument is more than 65 per cent, then it will be taxed same as equity schemes, otherwise like debt schemes.  


Therefore, one should assess their goals, risk appetite before investing in any investment avenue. Both of the above instruments have unique characteristics. Thus, rather than investing in any one of them, you can allocate your capital towards both instruments in order to receive optimum benefits. 

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