Mutual Fund vs NPS Tier Calculator

Today, investors have many options to build an investment portfolio and save taxes. Among all the investment options, mutual funds and NPS Tier I are popular for growing wealth and tax savings. Over time, people can build cash balances by implementing these options with specific objectives, frameworks, and risk tolerances.

So, if you want to know more about mutual funds as important investment options, keep reading this blog to better understand Mutual Fund vs. NPS Tier I.

A mutual fund is an investment option in which money is pooled from several investors to buy different assets, such as bonds, stocks, gold, or government securities. Professional fund managers manage the fund, and its returns depend on the fund's objective: growth, income, or stability. 

Some prominent features of mutual funds are as follows:

Mutual funds enable small investors, such as retail and institutional investors, to invest in the stock or bond markets without owning actual securities. Their openness and versatility, alongside the professionally managed aspect, make a mutual fund an attractive investment for investors regardless of their risk tolerance.

NPS, or National Pension System Tier I, is an investment plan sponsored by the Government of India that targets individual retirement planning. Through this plan, Indian citizens intend to establish a reasonable pension system. People can build their wealth throughout their working-age years and plan their income stream after retirement.

NPS Tier I is more of a long-term retirement investment with limited early withdrawals before age 60. NPS includes equity, government securities and corporate debt depending on the investor’s risk profile, but the equity portion cannot exceed 75%. The funds contributed to an NPS account are invested through professional pension fund managers. They hold a diversified pool of funds to gain optimal long-term returns.

Here are the key features of NPS Tier I:

Now that you understand both investment plans, let’s take a look at the key differences between National Pension Scheme Tier I and Mutual Funds below:

Mutual Funds: Created to meet a range of financial objectives, such as liquidity, savings, and wealth growth, and are suited for both short- and long-term goals. Mutual funds provide high levels of flexibility, enabling investors to redeem units whenever it is most convenient.

NPS Tier I: With limited withdrawal possibilities, this plan is specifically designed for retirement planning. It's perfect for long-term investors looking to accumulate a retirement fund.

Mutual Funds: Investors can choose from a variety of fund types and asset classes, including equities, debt, hybrid, sectoral, and more. Additionally, switching between funds is flexible.

NPS Tier I: Unlike mutual funds, investors have fewer options, even though they can select between asset classes (government bonds, corporate debt, and equity) and active or auto allocation. Additionally, there are legislated constraints on the portfolio mix, particularly concerning equity exposure.

Mutual Funds: Under Section 80C, Equity Linked Savings Schemes (ELSS) offer tax advantages of up to ₹1.5 lakh. However, a 10% tax is applied to long-term capital gains (LTCG) on equity mutual funds that exceed ₹1 lakh.

NPS Tier I: Any NPS subscriber may receive a tax benefit under Section 80 CCD (1) up to a total of ₹1.5 lac under Section 80 CCE. Under Article 80CCD (1B), NPS subscribers are the only ones eligible for an extra deduction for investments up to ₹50,000 in NPS (Tier I accounts). This is in addition to the ₹1.5 lakh deduction allowed by Section 80C of the Income Tax Act of 1961.

Mutual Funds: This investment option provides market-linked returns, and equity funds have a higher risk profile but can yield large long-term returns. Although they offer greater stability, debt and hybrid funds have lower returns.

NPS Tier I: This investment option offers comparatively moderate returns because of its balanced exposure to government securities, corporate bonds, and stocks. NPS is better suited for conservative investors looking for long-term retirement benefits because it strives for consistent growth.

Mutual Funds: With the exception of ELSS, which has a three-year lock-in, they typically offer high liquidity and allow redemption at any time. However, early withdrawals from some funds can be subject to exit loads.

NPS Tier I: Withdrawals are prohibited until age 60, except in certain circumstances such as illness or further schooling. The remaining amount can be withdrawn after turning 60, but a portion must be utilised to buy an annuity.

When trying to understand Mutual fund returns vs NPS Tier I returns, it is important to know that people who prefer mobility in investment and easy conversion of their assets to cash should invest in mutual funds. Also, people who have the urge to seek better yields than those offered by fixed deposits and other instruments may prefer mutual funds.

Mutual funds are well suited for short-term and long-term investments. These include purchasing a house, pursuing higher education, or gradually accumulating capital.

NPS Tier I is suitable for people who want a disciplined long-term investment plan for retirement. The government’s proposal has made NPS attractive to investors who want to save taxes. It is even more appealing to conservative investors who wish to have an affordable investment for their retirement savings.

Overall, the investor's risk-taking ability should be considered before comparing NPS schemes vs. equity mutual funds. The investor should maintain a balance in their investment portfolio. They should aim to earn wealth and income while saving taxes. Having both types of investments will increase returns and lower overall investment risk.