Equity vs NPS (Tier I & II): Which Builds More Wealth Over 15–30 Years?

When planning for retirement in India, many investors grapple with a fundamental question: Should I lean heavily into equity investments (via mutual funds or direct equity) or go the disciplined route of the National Pension System (NPS)? Over a long horizon of 15–30 years, which choice tends to build more wealth? In exploring NPS vs mutual funds returns, this blog examines the trade-offs, historical outcomes, and practical considerations. Ultimately addressing the burning query: Is NPS better than equity mutual funds for retirement? 

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Understanding the Basics: Equity, NPS Tier I & Tier II    

First, a quick primer: 

Equity investments (mutual funds / direct stocks): These channel money into equities (shares) either via actively managed funds, index funds, or direct stock picks. Returns can be high in bullish phases, but volatility is the risk. 

NPS (National Pension System): A government-backed retirement scheme, with two tiers: 

• Tier I is the primary retirement account; it has restrictions on withdrawal, a mandated annuity purchase for part of the corpus, and tax benefits. 
• Tier II is more flexible — it allows withdrawals without lock-in, but contributions to Tier II don’t generally attract the same tax deductions. 

Historical Returns: What Do the Numbers Say?    

One of the clearest ways to compare NPS vs equity investment returns is to look at historical performance. 

• NPS schemes historically tend to offer 10–12% annual returns, while equity mutual funds have often delivered 14–16% in the long run (on a risk-adjusted basis) 
• However, newer data suggest that certain NPS equity funds have recently outperformed some mutual funds. For instance, in 2025, some NPS equity funds delivered returns exceeding 13–15%, putting them ahead of several large-cap mutual funds. 
• The cost structure also matters: NPS tends to be cheaper (with lower fund management charges) compared to many actively managed mutual funds, which can erode downstream returns.  

That said, equities via mutual funds remain the more aggressive, higher-upside bet. Over multi-decade time frames, there are periods when equity funds (especially mid-cap or small-cap) generate outsized returns, which a more balanced or gradually de-risking NPS portfolio might not match. 

Hence, in pure growth potential, equity mutual funds often have the edge — but with higher volatility. 

The Role of Time Horizon: 15–30 Years    

When you stretch your horizon to 15, 20 or 30 years, several dynamics tip the scale: 

Compounding and the power of staying invested 

The longer you stay invested, the more impact compounding and periodic contributions have. Equity investments generally benefit more from long bull phases but also suffer more in prolonged down periods. NPS, with its mixed asset allocation, may cushion the downside. 

Volatility smoothing with NPS 

Because NPS gradually shifts allocation from equity towards safer instruments as you age, it offers a smoothing mechanism against severe market downturns late in life. This glide path helps protect the corpus when you draw closer to retirement. 

Taxation and withdrawal rules 

• In NPS Tier I, at retirement, 60% of the accumulated corpus can be withdrawn (often tax-free) and 40% must be converted into an annuity.  
• Mutual funds, depending on holding periods and type (equity or debt), face capital gains tax and exit loads. Equity mutual funds held over one year enjoy favourable long-term capital gains (LTCG) treatment but still face a 10% tax beyond certain thresholds.  
• Thus, in terms of after-tax wealth, NPS’s tax benefits can help close the gap. 

Liquidity and flexibility 

• Mutual funds win hands-down in flexibility — you can redeem (subject to scheme rules) whenever needed. In contrast, NPS Tier I is largely locked until retirement (with limited partial withdrawal conditions).  
• Tier II of NPS offers more flexibility (no rigid lock-in) but lacks the same tax advantages.  
• Thus, while equity mutual funds offer higher potential upside, NPS provides a more structured, relatively safer compounding engine for retirement savings. 

“Is NPS Better Than Equity Mutual Funds for Retirement?”    

To answer this directly, it depends on your priorities, risk tolerance and discipline. Here’s a balanced view: 

Cases where NPS might be better:   

• You want a structured, forced savings plan for retirement and are worried you might prematurely spend your corpus. 
• You prefer some downside protection and moderation of risk (especially in your later years). 
• You value tax advantages and want more certainty in your post-retirement payout structure. 
• You are comfortable sacrificing some upside for greater peace of mind and a more predictable retirement income. 

Cases where equity mutual funds are better:   

• You have a high risk appetite and can tolerate substantial volatility, especially in the early years. 
• Your main goal is maximum wealth creation, and you want control to tilt toward high-growth opportunities (e.g. mid/small caps, sectoral funds). 
• You may need liquidity or want to adapt to changing goals before retirement. 
• You’re skilled or have access to good fund managers or advice to pick top-performing funds and rebalance over time. 

In practice, many advisers and studies suggest a hybrid approach: use NPS Tier I for the retirement backbone (disciplined, tax-efficient, with a cushion against downside), and complement it with equity mutual funds (via SIPs or lumpsums) to chase higher growth and maintain flexibility.  

Final Thoughts:     

There is no one-size-fits-all answer. Here’s a balanced view: 

• Strengths of NPS for retirement: Tax benefits, low costs, forced discipline (lock-in), a mix of asset classes, and partial safety from overexposure. For someone who fears mis-timing or behavioural mistakes, NPS ensures you stay invested. 
• Strengths of equity mutual funds: Higher upside potential, flexibility, more investment choices and ability to stay fully in equity during promising phases. 

In practice, for retirement-focused investing over 15–30 years, NPS is a strong foundational pillar, but relying solely on NPS may cap your upside in bull markets. Many financial planners advocate a hybrid approach: use NPS Tier I as your backbone retirement vehicle, and supplement with equity mutual funds (or direct equity) outside of NPS to capture surplus growth. This diversifies risk and gives you optionality. 

Hence, NPS is not universally “better” than equity mutual funds for retirement, but it is often more prudent, safer and tax-efficient as a core. Equity mutual funds complement it for aggressive growth.