NPS Tier II vs. Mutual Fund

NPS Tier II Account

The NPS Tier II Account is a voluntary, flexible investment option offered under the National Pension System (NPS) in India. The National Pension Scheme (NPS) is a government-sponsored scheme managed by the Pension Funds Regulatory and Development Agency (PFRDA). 

The NPS Tier-2 account functions as a savings account, allowing you to deposit and withdraw funds at your convenience.

The NPS scheme offers you the following two investment accounts, making it a versatile choice for those seeking flexibility in their pension planning:

• NPS Tier I

• NPS Tier II

Overview of NPS Tier I and NPS Tier II Accounts

Some major features of NPS Tier 1 and NPS Tier 2 accounts are listed in the table below:

Mutual Funds

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They offer a professionally managed and easily accessible investment option, providing you with the benefits of diversification, liquidity, and professional expertise. Mutual funds are regulated by the Stock Exchange Board of India (SEBI) and offer various types, including equity funds, bond funds, and hybrid funds. It helps in catering to different risk appetites and investment goals. 

People also calculate: NPS Pension Calculator

Features of Mutual Fund Schemes

• Diversification: Mutual funds invest in a variety of investment instruments, which spreads the risk across different assets.

• Professional Management: Fund managers make investment decisions in the mutual fund schemes, leveraging their expertise for optimal returns.

• Liquidity: You can buy or sell fund units at the prevailing Net Asset Value (NAV) on any business day.

• Flexibility: Various mutual fund types cater to different risk profiles and investment objectives.

• Transparency: Regular reporting of NAV, holdings, and performance provides you with transparency.

• Affordability: Investors with modest capital can participate in diversified portfolios through mutual funds.

• Dividends and Capital Gains: Income generated by the fund is distributed to investors through dividends or capital gains.

• Systematic Investment Plans (SIP): Mutual fund schemes allow you to contribute regularly through SIPs, promoting disciplined investing.

• Tax Benefits: Certain mutual funds offer tax advantages, such as the Equity Linked Savings Scheme (ELSS), which is eligible for tax deductions under Section 80C and 10(10D) of the Income Tax Act, 1961.

Difference Between NPS Tier II vs. Mutual Fund

The key differences between mutual funds and NPS Tier 2 accounts are listed in the following table:

*Tax benefit is subject to changes in tax laws. Standard T&C apply.

NPS Tier- 2 vs. Mutual Fund: Which is Better?

You can decide the best investment option for you among the Mutual Fund vs. NPS Tier 2 account as per the following key considerations:

1. Choose NPS Tier-2 if:

   • Retirement is Your Focus: Tier-2 offers tax benefits on withdrawal at retirement.

   • Lower Fees Appeal to You: Tier-2 has significantly lower expense ratios than most mutual funds.

   • You Have Long-Term Goals: Tier-2 allows up to 50% investment in equity for long-term growth.

2. Choose Mutual Funds if:

   • You Need Flexibility: Funds offer easier access to your money with no lock-in.

   • Specific Goals Matter: Diverse fund options cater to various financial goals like child education or a vacation.

   • Higher Risk Appetite Drives You: Some funds offer higher equity exposure for potentially higher returns.

In Conclusion

In investments, one criterion does not fit all. Everyone has different goals, objectives, and investment capacities. For a capital growth goal, equity mutual funds are a better option. 

NPS should be your choice if you doing retirement planning to create a corpus with regular investments over the long term. You should be careful before making these decisions and should do intense research before investing in any scheme.