Hello Readers!

Retirement, simply, the stage of life, where the mind wants to be completely tension-free. When people retire, they cannot work full time. They need to focus on their health as well as their spouse who has aged with you. The best way to take care of all these uncertainties and financial needs of theirs after they retire, is, to have a good retirement plan. 

Generally, people start investing in their 30’s, through different ways like FD (Fixed deposits), mutual funds, NPS (National Pension Scheme), and many more, in order to accumulate much, that can take a stand for their post-retirement expenses. Well, there are a lot of options to invest and accumulate for your retirement, but many people do often get confused between the two popular methods or ways, NPS (National Pension Scheme) and SIP (Systematic Investment Plan) in Mutual Funds. 

Through this blog we are going, to discuss NPS and SIP, benefits of both, and, why SIP in mutual funds is more suitable than NPS, for the retirement plan.

What is NPS (National Pension Scheme)?  

National Pension Scheme was introduced by the Central Government, with a motive to initiate, social security for individuals employed in the private, public, and unorganized sectors. Investors investing in NPS is required to invest or allocate a certain amount from your income towards a pension account during the employment period regularly.

At the time they retire, their investment will also mature, and they can withdraw a certain percentage of the total corpus. The remaining portion of the corpus will get credited to your account in the form of a pension monthly.

What is the SIP (Systematic Investment Plan)? 

SIP or Systematic Investment Plan is a provision offered by Mutual Funds to its investors through which the investors can invest their part of the amount in a disciplined manner that is they can invest a fixed amount of their total part of investment at a fixed interval of time.

Benefits of NPS

  1. Voluntary in Nature: Investor of NPS, can invest at any point of time in a financial year, also they can change the amount, set aside and save every year.
  2. Simple to Invest: People only require opening an account with any one of the POPs (Point of Presence) or through e-NPS (Online medium) and they can start investing in NPS.
  3. Flexible: Investor has the right to choose their own investment options and pension fund and see the money grow.
  4. Portable: In case if the investor changes his city or town, in that case also, they can operate their investment easily
  5. Regulated: NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.

Benefits of SIP

  1. Convenient: A SIP is another name for the habit of regular and disciplined savings. Through SIP, investors can start their investment in mutual funds with a mere amount of Rs 100, monthly, quarterly or yearly.
  2. Rupee Cost Averaging: A key feature of SIP, also restricts the investor to track the market value on a regular basis. This feature lets a SIP investor buy more units when the market is low.
  3. Power of compounding: SIP benefits are calculated based on the compound interest which benefits an investor who starts investing early and invest regularly for a long period of time, in a very positive way.
  4. Higher Returns: SIP in mutual funds offer higher returns in comparison to traditional fixed deposits and recurring deposits.
  5. Emergency Fund: SIP investments can also work as an emergency fund for its investors. They can withdraw their entire investment from a mutual fund at any time. This is beneficial in case of an emergency.

Taxation in NPS and SIP in Mutual Funds

Both NPS and SIP in Mutual funds offer tax benefits under Section 80C of the Income Tax Act, 1961. To avail the tax benefits in mutual funds, investors need to invest in ELSS (Equity Linked Saving Scheme) mutual fund through SIP investment. An ELSS is a type of equity-based mutual fund under which the investor is eligible for tax deductions of up to ₹1.5 lakhs per annum, whereas NPS is a government-backed investment scheme.

Why SIP in Mutual Funds Is More Suitable Than NPS? 

Well, both NPS and SIP in mutual funds are considered a good investment plan for retirement, but there are some factors that make SIP in mutual funds more prevailing and profitable than NPS. Let us look at these factors:

1. Risk vs Returns

Both SIP and NPS are equity-based products that are, they both offer market-linked returns. The only difference is, NPS invest about 75% of its investment in equities while the remaining 25% in debt funds, whereas ELSS is a 100% equity-based product and a SIP in an ELSS plan will offer higher returns over the long run for retirement.

2. Lock-in period

The lock-in period refers to the period, for which it is necessary for an investor to hold their investment. An ELSS mutual fund comes with a lock-in period of 3 years while you can withdraw from an NPS only after the age of 60 years or retirement.

3. Income Tax

Both NPS and SIP offer tax benefits, but returns are still subject to tax. In NPS, out of 60% amount that the investor withdraws at the time of retirement, 40% is free while the remaining 20% is subject to tax.

Investments of only up to Rs 1.5 lakh per annum, in ELSS, are tax-exempt, if any investor exceeds this limit, they won’t be qualified to avail the tax benefits under Section 80C.

However, the Long-Term Capital Gains on ELSS, up to Rs 1 lakh per annum, is exempted from tax, also, the dividend received is tax-free in the hands of investors.

As of now, you are aware of the benefits of both NPS and SIP in a mutual fund, also you are aware of the factors that make SIP in mutual funds more efficient than NPS. So, I would suggest, invest through SIP in ELSS mutual funds, you can build a big corpus for your retirement plan, along with that you can also avail good tax benefits.

Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.

You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).