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NPS vs Mutual Fund is a comparison that many investors think of while investing. The goal of retirement planning is such that it requires a well-thought-through plan. In this article, we have covered the differences between NPS and mutual funds. These aspects will help you in deciding which is better for you, NPS vs Mutual Fund.

Long Term Portfolio
Long Term Portfolio

The right mutual funds for your long-term goals with inflation-beating growth plus risk management.

Indicative returns of 10-12% annually

Indicative returns of 10-12% annually

Investment horizon of 5+ Years

Investment horizon of 5+ Years

No lock-in

No lock-in

Long term goals such as retirement or building your wealth

Long term goals such as retirement or building your wealth

What is National Pension Scheme (NPS)?

National Pension Scheme (NPS) is a Central Government scheme in which employees from public, private and unorganised sectors can invest. Investors can open an NPS account and invest a sum regularly. Upon retirement, the investor has the option to withdraw a partial amount in lump sum. The amount of investment is available for a tax deduction of Rs 1.5 lakh under section 80C. Additionally, you can claim up to Rs 50,000 under section 80CCD in a financial year.

Who Should Invest in National Pension Scheme (NPS)?

NPS is a pension scheme with the aim of providing financial stability post retirement. It is a better investment option for an investor who wants to plan for his/ her retirement and has a relatively lower risk tolerance level. It has an added advantage of tax deduction up to Rs 2 lakh under Section 80C and Section 80CCD. NPS invests a portion of its corpus in equity. This portion of equity allocation is exposed to market fluctuations, risks, and returns. Hence, depending on the investment objective, cost of living and earnings, and how much risk an investor wants to take he/ she must decide on the investment option.

What is a Mutual Fund?

A mutual fund is a professionally managed investment fund. It pools or collects investment from different investors. It invests the collected corpus in the best possible way to maximize returns and achieve investment objectives. Since the fund is managed by a professional the funds are allocated across sectors, industries, securities, and debt instruments. You can easily invest in mutual funds through a periodic SIP or a lumpsum amount. With mutual funds, you must always ensure that the investment objective of the fund matches your own investment goals. Secondly, match other criterias such as liquidity, investment horizon, exposure to equity, and debt.

Why Invest in a Mutual Fund?

  1. Expert Money management by a team of experts who actively and consistently aim towards maximizing growth opportunities for its investors. In exchange for such services, the asset management companies charge an expense ratio. that varies from one mutual fund to another. 
  2. Mutual funds provide diversified portfolios comprising of equity, debt, market capitalization, sectors, and industries. 
  3. It is a low cost investment in exchange for expert management, flexibility, and diversification. The fee charged ranges from 0.50% to 1.50%.
  4. You can redeem your investments anytime without any lock-in period. However, if you have invested in ELSS then a lockin period of 3 years is applicable. Further, it is always advisable to aim for a long-term goal while investing in equity mutual funds.
  5. You can invest in a small amount at a regular interval using Systematic Investment Plan (SIP). This way you can kick start your investment and develop a habit of saving. 

Learn ETF vs Mutual Fund

NPS vs Mutual Fund: Key Differences

The following table summarises the key differences between NPS and Mutual Funds:

Basis of DifferenceNPSMutual Fund
Minimum InvestmentINR 6,000INR 500
RiskLow risk than mutual fundsHigh Risk
Lock in PeriodUntil retirementNo lock-in. However, 3 years for ELSS mutual funds.
Premature WithdrawalOnly 20% of the corpus can be prematurely withdrawnCan be redeemed anytime. ELSS funds do not allow premature withdrawals. 
Expense RatioLowHigh
Tax BenefitUpto INR 1,50,000 per annum under Section 80C, and an additional INR 50,000 under Section 80CCD(1B).Only for ELSS mutual funds. Upto INR 1,50,000 per annum under Section 80C.

NPS vs Mutual Fund – Difference Between NPS and Mutual Fund

In structure NPS is similar to a mutual fund scheme; 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 endeavors to grow your money over time and give a reasonable return in the long term.

Here is a complete view on NPS vs Mutual Fund, difference between NPS and mutual fund. The following factors or parameters will help choose the appropriate choice for you by differentiating between mutual fund and NPS.

Equity Allocation and Exposure

Where ELSS primarily invests in equity-oriented mutual funds while NPS has a lower allocation of funds towards equity-oriented mutual funds. Hence, ELSS has a higher potential to generate higher returns than NPS.

Tax Benefit

NPS have the provision to give you a higher tax deduction of up to Rs 2 lakh under sec 80C as compared to Rs 1.5 lakh for ELSS schemes. In NPS, the advantage is that you can take a maximum of 60% of the total corpus out as a lump sum at maturity and 40% of this is exempt from tax.

The remaining amount is to be invested in an annuity that gives you a regular income for the rest of your life. This amount is exempt from tax, even though the income you receive from the annuity is taxable at applicable slab rate. 

Both the investment options offer tax benefits. However, there are greater tax benefits in NPS as compared to equity mutual funds where long term gains are taxed at 10% on withdrawal. 

Lock-in period

ELSS has a lock-in period of 3 years while NPS has a lock-in till retirement which is much higher than tax saving mutual fund ELSS. You cannot redeem your entire investment before completing at least 10 years or reaching 60 years. You can though, make partial withdrawals for very specific reasons, subject to a 25% upper limit (of the subscriber’s total contributions).

Risk Exposure

Since ELSS has a higher exposure to an equity-oriented mutual fund, the risk associated with investment is also high. However, the risk factor depends on how much risk an investor is ready to bear depending on his own cost of living and earnings. The funds are managed by a fund manager who is responsible for active management of the funds.  A fund manager also ensures and aims at a higher return for the mutual fund portfolio.

Cost of Fund Management

With 0.1% management fees, NPS  is the lowest cost managed fund you can invest in for your retirement. The asset management companies charge an expense ratio ranging from 0.50% to 1.50% which is much higher than the cost of management of NPS.


The Tier I NPS investment, which is mandatory to open an NPS account has a restriction on withdrawals. You cannot redeem your entire investment before completing at least 10 years or attaining the age of 60 years. However, you can partially withdraw on fulfilling the conditions, subject to an upper limit of 25%. Hence, you don’t have flexibility in your investment. Investment in equity, through NPS, is restricted to 75% of your total money invested in NPS.

This means, you cannot choose to invest in such a way that your corpus is only invested in long term equity assets, you will mandatorily need to have some fixed income exposure too. This restricts long term returns; over long periods of 10-15-20 years, equity assets work best in delivering efficient inflation plus growth. 

Equity mutual funds whether in the tax-saving ELSS avatar or otherwise award you a lot more flexibility in terms of choosing options, schemes and investment time horizon; use this flexibility to build the retirement corpus that suits you best.

NPS vs Mutual Fund: Which is Better?

No doubt, retirement planning is an important part of your personal money management and with all the investment options available it can get confusing. The National Pension Scheme (NPS) under the aegis of the PFRDA, the pension regulatory authority in India has made a niche in this segment. Moreover, some even refer to it as the mutual fund for retirement. 

However, an investor should not confuse mutual fund investments with the NPS scheme. Both the investment option have their own unique advantages and limitations. Hence, in the discussion of NPS vs Mutual Fund which is better and who should choose what, an investor should first set his/ her goals and parameters right.

Frequently Asked Questions

Can you transfer NPS funds across categories?

Yes, NPS gives the flexibility to transfer funds across three different categories, namely stocks, corporate bonds and government bonds.

How many mutual funds and NPS investments can an investor make?

An investor can invest in several mutual funds across different fund houses. However, the NPS subscriber can invest only in one fund throughout their lifetime.

Are mutual funds and NPS regulated by the same body?

No, the Securities and Exchange Board of India (SEBI) regulates and monitors mutual funds in India. While the Pension Fund Regulatory Development Authority of India (PFRDA) regulates NPS.

Is NPS allowed for 80C deduction under the Income Tax Act, 1961?

The NPS contribution qualifies for deduction under Section 80CCD (1) up to INR 1.5 lakh. The employer’s contribution to the NPS account qualifies for deduction under Section 80CCD (2). Also, the NPS subscribers are eligible for extra deduction under Section 80CCD (1B) up to INR 50,000. Thus, this is an addition to the Section 80C deduction of INR 1.5 lakh permitted under Section 80C of the Income Tax Act, 1961.

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