Investment Instruments: Mutual Funds vs National Pension Scheme

Investment Instruments: Mutual Funds vs National Pension Scheme

by 5paisa Research Team Last Updated: Dec 13, 2022 - 11:59 pm 48.4k Views
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NPS and Mutual funds are the most popular investment instruments for retirement planning which deliver decent returns to their investors.

There are various investment instruments available for an individual where he can park his funds to plan for his retirement. Every investment instrument has unique features and has different riskiness. One can make investments in instruments such as equity, debt, bank fixed deposit, post office savings scheme, mutual funds, National pension schemes, Public Provident Funds, etc to execute a better financial plan. An individual can fulfil his life goals by adequately planning their investments and creating a diversified portfolio. Retirement planning is an essential aspect of every individual’s life. This life goal of an individual is a long-term goal.

So, 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 an investment instrument where an individual can invest in for their retirement. This scheme is regulated by Pension Fund Regulatory & Development Authority (PFRDA). NPS can be subscribed by any citizen of India.  

These funds are professionally managed funds which pool the corpus from investors and allocate the same across various asset classes. One can invest in these funds in order to fulfil short term as well as long term goals. Mutual funds are regulated by Securities Exchange Board of India (SEBI).  


These schemes have lower risk as compared to mutual funds and direct equity  

Mutual fund schemes are risky than NPS but less risky than direct equity  


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, the Govt of India pays Rs 1,000 per year for 4 years of contribution.    


Mutual fund has five main categories of scheme such as:  

Equity-oriented schemes: these schemes pre-dominantly invests in equity and equity-related instruments.  

Debt-oriented schemes: these schemes chiefly invest in debt and money-market instruments.  

Hybrid schemes: These schemes invest in combination of both debt and equity instruments.  

Solution-oriented scheme: These schemes enable an individual to create a corpus for their children education or marriage, etc. and retirement.  

Other Schemes: Other schemes are divided further into two subcategories such as Index Funds/ETFs and FoFs (Overseas or Domestic)  

Tax Benefits  

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% of salary, whichever is lower.    

Other individuals-    

• Assessee’s contribution,  or    

• 20% 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% of basic pay + dearness allowance    

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


Equity oriented schemes:  

Short term Capital Gains – The capital gains arising within 12 months are taxed at the rate of 15%.  

Long term Capital Gains – The capital gains arising after 12 months are exempt up to ₹1 lakh and are taxed if capital gains exceed ₹1 lakh, then they are taxed at the rate of 10% without indexation benefit.  

Debt oriented Schemes:  

Short Term Capital Gains: The capital gains arising within 36 months are taxed as per income tax slab rates of an assessee.  

Long Term Capital Gains:  

The capital gains arising after 36 months are taxed at the rate of 20% with indexation benefit.  

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




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