Any suggestion on NPS? Which is better - NPS or mutual funds?
AskedNational Pension Scheme, also known as NPS, is a defined contribution pension scheme launched by the Government of India. It has three main objectives- To provide old age income, reasonable market based returns over long run and extending old age security coverage to all citizens. Launched in Jan 2004, it initially focused on the new government recruits (except armed forces) but since May 2009 it has been extended to all citizens of the country including the unorganised sector workers on voluntary basis.
A subscriber of NPS will be provided with a unique Permanent Retirement Account(PRAN) which will provide access to two personal accounts- Tier I Account- a non-withdrawable account meant for savings for retirement, Tier II Account- a voluntary savings facility. No tax benefits are available on this account and limitless withdrawal of money is allowed.
There are various benefits of the NPS scheme including additional tax benefit, low default risk, handled by skilled experts and higher fees to intermediaries. However, it comes along a number of cons as well. These include- low annuity returns, very long lock-in period, mandatory annuity and taxation on maturity.
Mutual funds and NPS can be compared on the following parameters:
Liquidity- mutual funds are highly liquid in comparison to NPS
Flexibility- mutual funds are highly flexible and allow deployment of funds as per investors' preference whereas there is a compulsion in NPS to open an account of compulsory annuity purchase on withdrawal.
Equity Exposure- Maximum permissible equity exposure is 50% under NPS. However, there are no such limits in mutual funds and therefore depends on the risk taking ability of the investor.
Tax Benefits- NPS Tier I offers a tax benefit on investments of upto Rs 1 lakh. Intermediate gains in NPS are not taxed.
Transaction Ease- Mutual funds have an upper hand in terms of services when compared to NPS.
Cost- Charges including transaction fee and fund management fee are about 0.5 per cent under NPS whereas mutual funds charge a comparatively higher amount. This difference makes a huge impact in the final returns in the long term.
Choice of Asset Classes- There are limited asset classes to choose from, namely, government securities, equity and other fixed income securities. But in case of mutual funds there are various options available including gold, equity, real estate, debt, etc.
Overall, NPS provides fixed income returns but is more suitable for conservative investors. Mutual funds seem to have a lot more benefits and are therefore a better option to invest in.