image title

Should You Invest in Equity Mutual Funds or NPS for Retirement?

Jagrity Sharma Jagrity Sharma 14 March 2019

Looking for pension plan options? Equity mutual funds or the new NPS make for compelling cases. Keep reading to find out which option to choose.

image title

About a decade ago, an individual had very limited options when it came to planning for retirement. However, that is not the case anymore. With modern investment options and tools at their disposal, planning for retirement has become a tad easier.

NPS or the National Pension System is again in the news, thanks to some revisions to the taxation side of things. If you aren’t aware, the government is pushing NPS to be more tax friendly. Recently, the government has added a provision of letting individuals withdraw up to 60% of the corpus on retirement. Subscribers must then utilize at least 40% of the corpus to buy annuity plans.

How was NPS Calculated?

The calculations were a bit different earlier. Regulations allowed NPS subscribers to withdraw only 40% of the total corpus that they had managed. The subscribers then had to buy annuity plans for 40% of the remaining corpus. For the remaining 20%, they had the option of either buying annuity plans, or withdrawing the amount by paying necessary taxes.

With the above modifications, the question arises- Should you consider NPS as your pension plan or should you look at equity mutual fund for the same? Some experts are of the belief that with the increased withdrawal limits and lesser tax burden, the new NPS makes for a much better option. But is that really the case?

Details of “New” NPS

Firstly, let’s see what has really changed. Unlike what some experts want you to believe, the new NPS is not completely tax free. Now, you have the ability to withdraw about 60% of the corpus tax free. You still would end up buying an annuity for the remaining 40% of the corpus.

Secondly, the idea of investing in NPS makes a lot of sense if you are willing to invest in government-sponsored products for your retirement. When you opt for NPS, you must invest regularly till you reach 60 years of age. Another important caveat being that you can only withdraw 20% of the total corpus if you wish to get out of NPS before attaining the age of 60 years. For the remaining 80% of the corpus, you must buy an annuity plan.

This might seem to be a rather small hiccup, but it is not. It is much larger a problem than it might seem. In the event that you wish to retire early or face an unavoidable situation where you wish to use your corpus, you can only use 20% of it, provided you want to exercise it before reaching the age of 60.

Mutual Fund

The other alternative for a pension plan is to invest in equity mutual fund. An equity mutual fund offers a lot of additional freedom when it comes to handling your pension plan or retirement. An equity mutual fund usually has a low lock in period. This means, that if you are not happy with the performance of the fund or the decisions of the fund manager, you can always choose to opt out and invest in a separate fund.

The same cannot be said about NPS plans. While investing in NPS, you have the option to choose only from a limited list of a pool of NPS fund managers. Another big advantage of opting for an equity mutual fund is that you have the liberty to do whatever you wish to from the funds. In other words, you are not bound to buy annuity plans with the fund.

Any gains that you make on your equity mutual fund is taxable at 10%. As per recent changes to long term capital gains tax, if your total gains do not exceed INR 1 lakh, the same is exempt from taxes.


The first and foremost difference is the lock-in period. While an equity mutual fund has a lock-in period of three years, the same for a pension plan is the retirement age of 60 years. Both the fund types are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. However, with NPS, you can avail an exemption of additional INR 50,000 under Section 80CCD(1B). The minimum investment for NPS starts at INR 500 and INR 6000 per annum. While the minimum amount for an equity mutual fund remains the same at INR 500, there isn’t any minimum amount that you must invest per year.

All your investments in equity mutual fund get into equity and it is actively managed by a fund manager. However, for a pension plan like NPS, your funds are split into bonds and equity. Half of your investment is allocated to equity and the other half to government bonds.

Another major difference between both the fund types is the premature withdrawal. With NPS, you have the option to withdraw prematurely, but only a certain portion of the total corpus. However, the same is not possible with an equity mutual fund. You will have to wait for the completion of the 3 year lock-in period to withdraw your funds.

Thus, it largely comes down to your personal preference, as to which mode you want to invest in. While NPS offers additional tax benefits, it is mostly marred by the high cap on premature withdrawal. An equity mutual fund, on the other hand, offers much higher flexibility and options. Once you complete the three-year lock in period, you have the option of redeeming the units. Since the allocation to equity in equity mutual fund is higher, the relative returns are higher as well.

While these two are great solutions for a pension fund, they are not the only ones. You can invest in a ULIP for your retirement fund as well. It offers the same tax benefits as an equity mutual fund. The investments are tax deductible under Section 80C of the Income Tax Act and you can invest up to INR 1,50,000 for tax benefits in a fiscal year.

Whether a policyholder sees the maturity of the policy or loses his/her life, the benefits received are tax free, under Section 10D. Also, they offer a great deal of flexibility. With ULIPs, you have the option to change the structure of your investments as well. Moreover, you do not have any restrictions on how you can use the fund that you receive from a ULIP.

Thus, depending on which of the above best suit your needs, you can invest in them for your retirement needs.

Recommended Read: How to plan your Retirement with Mutual Funds

Jagrity Sharma
Written by Jagrity Sharma
A bibliophile who hates alliterations, but loves cream, comics and content immensely! On another note, a content marketer who leverages the power of words to explain...almost anything!