Know the Differences Between NPS and Mutual Funds

The National Pension Scheme, or NPS, is a retirement benefit scheme introduced by the Indian government in 2004. A mutual fund, on the other hand, is an investment tool that consists of a portfolio of stocks, bonds, or other securities and is overseen by a professional fund manager. 

NPS Vs. Mutual Funds - Understanding Both the Investments

NPS: The National Pension System (NPS) is a voluntary pension scheme the Government of India launched to provide retirement income to Indian citizens. The Pension Fund Regulatory and Development Authority regulates the scheme. It's a market-linked product that allows investors to invest in a combination of equity, corporate debt, government debt, and alternative assets. 

NPS offers two different types of accounts, Tier I and Tier II. Tier I account remains locked until the investor is 60 years of age. Meanwhile, Tier II is voluntary, and to be eligible to avail of this account, the investor will need to hold a Tier I account. Unlike Tier I, in Tier II accounts, the investor can withdraw funds anytime. 

The National Pension Scheme is an investment open for all citizens in the country, including unorganized sector workers. It is a structured retirement saving plan to provide financial security in old age. The contributions made in NPS are spread across different asset classes like Equity, Corporate Bonds, Government Securities, and more. However, the scheme offers flexibility in asset allocation through active choice and auto choice.

On reaching 60, the NPS account matures, and the investor can withdraw up to 60% of the maturity value as a lump sum payment. The balance of 40% can be used to purchase a regular pension annuity. 

Mutual Funds: A mutual fund is a professionally managed investment vehicle that pools money from various investors to purchase a diversified portfolio of assets, including stocks, bonds, and money market instruments. It simple terms, it is a pooled investment vehicle, where money is collected from investors who share a common investment objective.

Various categories of mutual funds cater to diverse investment preferences, including active, passive, equity, fixed income, balanced funds, and more. Each fund type comes with its unique set of features, potential rewards, and associated risks. Notably, the majority of mutual funds offer flexibility by not imposing a lock-in period. This flexibility allows investors to align their choice of funds with their specific financial goals, risk tolerance, and investment horizon, empowering them to make informed and personalized investment decisions.

Disclaimer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.