NPS vs Mutual Fund

 

 

NPS vs MF

 

Retirement planning is an important part of any one’s  personal money management.

 

Two most important options while creating Retirement Corpus are

 

1.NPS (National Pension Scheme)  and

2. Equity Mutual Fund

 

Please note that retirement corpus can not be created in day 1. It is a Long term process and requires time and patience.

 

 

NPS : Many people have subscribed to NPS  simply because his friends have subscribed and they know it is a govt scheme so it will be risk free. Please note that NPS is not risk free and  does not guarantee protection of your Principal and/or return. Returns are earned by market parameter coz corpus of NPS also invests in Capital Market.

 

National Pension Scheme – The NPS is a contributory pension system where the subscriber contributes to the fund over their working life and at retirement draw the corpus so created to buy an annuity that will provide regular income in retirement.  It is open for any individual of age range of 18 to 65 years. Minimum Lock in period is 15  years but if you enter at 65 years age you can exit after 3 years.

 

The eligible subscribers to the NPS are allotted a 12-digit unique Permanent Retirement

Account Number (PRAN) on registration with the NPS . All activities of the subscriber, such as  contributions, investments, withdrawals, personal information modifications, etc are recorded under the PRAN. The PRAN is portable across employers and locations, whether in the government sector, private sector or self-employed. Means if you change your employer your PRAN is not changed.

 

How NPS earns returns : Fund is managed by professional Fund Managers . They invest your money in Capital Market as per your selection of Life Cycle Fund.

The scheme is under PFRDA (Provident Fund Regulatory Authority), established by Govt of India,  and there is good protection system through NPS Trust, Trustee Bank , POP (Point of presence) , CRA (central Record Keeping Agency), etc.

 

 There are  3 life cycle funds  you can choose while subscribing to NPS

 

1.    Conservative Life cycle fund : This is for them who wants to take low risk in their capital , so such fund invests  your money less in equity and more in bonds and govt securities to earn returns. Returns are comparatively low as risk is low.

2.    Moderate Life Cycle Fund : This is for those subscribers who wants to take moderate risk so such fund invests 50% of your money in Equity , 40% in corporate bonds and 10 % in Govt security . Returns are moderate

3.    Aggressive Life Cycle Fund : This is for those who wants to take more risk and earn high returns. 75% of your money is invested in Equity.

 If you do not exercise your option Moderate Life cycle fund is chosen as default .

If you are young and has long retirement Period choose Aggressive Life cycle Funds , coz long term investment can tolerate ups and down of market more effectively .

 

 

Mutual Fund : Mutual Funds are regulated by SEBI , established by Govt of India. Any person can purchase MF , there is no age limit , no Demat Account is needed for MF. On Investment,  a Portfolio number is allotted , that is proof of purchase. One can purchase from any agent or directly from an APP . There are two registrar for MF , one is CAMS (Computer age Management System) other is KARVY . All Fund houses are either regulated by CAMS or KARVY .You can see your investments in CAMS app or Karvy App , no matter from which agent your have purchased.

 

Both NPS and MF invest your money  in capital market , so which one is better .

 

NPS : Under NPS your money is invested in 3 asset classes , Equity , Corporate Bonds and Govt Security . How much your money is invested in each class , depends on which life cycle model you have opted while subscribing NPS , if you have choosen Conservative Model only 25% of your money is invested in Equities . Since Equities gives highest earning , and since in this model your allocation is less in Equities , return will also be less, Risk is also less.

 

MF : There is no restriction in allocation of Fund in Equities , Bonds etc. You can buy pure equity Fund like ELSS (Equity Linked Saving Scheme) or buy Hybrid Fund where Equity , and Debt funds are mixed. Return in ELSS fund is far superior then NPS

 

Pros n Cons :

 

1.    In NPS investment tenure is long usually 15 years , you cant withdraw your money once invested ( though there are some restricted withdrawal allowed) . But in MF you can withdraw any time though there are some penalty if you withdraw before 1 year . ELSS has lock period of 3 years. So MF has higher liquidity

2.    You compulsory has to invest minimum  40% of your accumulated fund to buy an annuity on exit from  NPS. This annuity will provide you pension. Only 60% you can withdraw as lumpsum . MF has no such restrictions.

3.    under NPS Pension scheme once choosen can not be altered or changed later. Amount of pension is also fixed for whole Life time . It means there is no protection from inflation. In MF with SWP option you can choose your amount of monthly regular income and can increase or decrease any time or even stop to let your corpus grow more.

4.    Tax Benefit , Greatest benefit of NPS was Tax benefit . There was additional Rs. 50000 investment allowed apart from Rs.1.50 under 80C. so if you are under 30% tax bracket you immediately get a Tax benefit of Rs.15000 on an investment of Rs. 50000 . It is 30% return in a year , which is modest return .. Most people  invests in NPS just to take Tax benefit.

 

However after introduction of New Tax Regime , all rebates were neutralized and any income above 15 Lakh has no effect in Tax . whether you claim rebate on saving  or not . So now NPS is not a Tax heaven for investment .

 

Which One you should Choose :

 

On Historical Analysis , it has been seen that 15 years NPS generates around 8 to 9% CAGR (compounded Annual growth rate)  while MF has given superior returns of  20% CAGR over same period.

 

A Rs.10000 SIP PM  in Equity MF over a period of 10 years will generate around Rs. 33 lakh on an investment of Rs. 12 lakh , this is because SIP has Averaging and Compounding benefit quality .

 

After Exit from fund you have 33 lakh in hand , if you opt SWP you can withdraw Rs. 21000 PM as monthly income for life time and your investment will also keep growing and in another 5 years it can definitely become 35 Lakh even after drawing 21k PM

 

A SIP of 10000 PM in NPS over same period  can generate atmost Rs.18 lakh . This is because maximum exposure to equity is only 75% of your fund and this keep being reduced by 3% every year as per rule.  Out of Rs.18 Lakh minimum 40%  (Rs. 720000) to be used  to buy annuity , which can give you a pension of maximum Rs.7000 PM . Remaining Rs.10.80 lakh you can withdraw as lump sum and invest in another MF which may give you a monthly income of Rs.8000 pm , if SWP opted. So total monthly income will be Rs.15k under NPS as against Rs.21k in MF . Also your Rs. 720000 invested to buy annuity will never appreciate and remain fixed.

 

Now from Tax point of view  Rs. 7000 received as pension from NPS will be fully taxable , but income received as SWP from MF is taxable as Capital gain component and not whole Rs.21000 .Also first 1 Lakh as capital gain is tax exempt as Long Term Capital gain  . So from Tax point of view also MF investment and drawing monthly income via SWP score higher over NPS.    

 

Conclusion :

 

You can choose a mix of both . Invest 20-30% of your SIP amount in NPS and rest in Equity Oriented MF 

@Ajit Kumar Singh