When planning for your financial future, the big question many investors face is: “NPS vs Mutual Funds – who is giving higher returns?” With both options gaining popularity in India, it’s important to understand how they work, what kind of returns they offer, and whether your current investment strategy is aligned with your long-term goals.
NPS vs Mutual Funds: Who is Giving Higher Returns?
| Feature | NPS | Mutual Funds |
|---|---|---|
| Purpose | Retirement-focused | Wealth creation, short- and long-term goals |
| 1-Year Returns (2025) | Up to 13.75% (DSP Pension Fund) | ~9.5% (Nippon India Large Cap) |
| 5-Year Returns (2025) | Up to 17.38% (UTI Pension Fund) | ~13-15% (Top equity funds) |
| Tax Benefit | Up to Rs 2 lakh (Sec 80C + 80CCD(1B)) | Rs 1.5 lakh under 80C (ELSS only) |
| Lock-in Period | Till age 60 (partial withdrawal allowed) | 3 years for ELSS, none for others |
In the ongoing debate of “NPS vs Mutual Funds – who is giving higher returns?”, there’s no one-size-fits-all answer. NPS is a powerful retirement tool, offering tax benefits and stable returns, especially when held long-term. Mutual funds, on the other hand, shine in flexibility, liquidity, and broader investment opportunities.
The best strategy? Combine both. Use NPS to build your retirement nest egg and mutual funds to grow wealth and meet intermediate goals. As always, consult a SEBI-registered financial advisor before making major portfolio changes.
What is NPS (National Pension System)?
The National Pension System is a government-backed retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It allows you to invest in a mix of equity, corporate debt, and government securities, depending on your risk preference.
Key Features of NPS:
- Long-term savings for retirement
- Low fund management cost (0.01% to 0.09%)
- Equity exposure capped at 75%
- Tax benefit up to Rs 2 lakh (Rs 1.5 lakh under 80C + Rs 50,000 under 80CCD(1B))
- Mandatory annuity purchase after retirement
For salaried individuals, NPS also offers an employer contribution option, making it an attractive corporate savings plan.
see also: Shock to PNB Customers, FD Interest Rates Reduced
What Are Mutual Funds?
Mutual funds are professionally managed investment vehicles where money from multiple investors is pooled and invested in stocks, bonds, or a mix of both. They are managed by Asset Management Companies (AMCs) and regulated by SEBI.
Types of Mutual Funds:
- Equity Mutual Funds – High risk, high return
- Debt Mutual Funds – Lower risk, steady return
- Balanced/Hybrid Funds – Mix of both equity and debt
- ELSS (Equity Linked Saving Schemes) – Tax-saving option under Section 80C
Mutual funds are highly flexible and liquid, making them ideal for both short-term and long-term goals beyond retirement.
NPS vs Mutual Funds: Return Comparison (With Latest Data)
NPS Performance (As of March 2025):
- DSP Pension Fund (Tier I): 1-year return – 13.75%, 5-year return – 16.98%
- UTI Pension Fund: 1-year – 12.87%, 5-year – 17.38%
- LIC Pension Fund: 5-year CAGR – 15.89%
Mutual Fund Performance (Large Cap Equity Funds):
- Nippon India Large Cap Fund: 1-year – 9.58%
- ICICI Prudential Bluechip Fund: 1-year – 9.02%
- Axis Bluechip Fund: 5-year CAGR – 13.12%
NPS equity funds have outperformed mutual funds in the past 1 to 5 years, especially in large-cap categories. However, returns in mutual funds can vary significantly based on fund type, fund manager, and market conditions.
Tax Benefits: Which One Saves You More?
NPS:
- Rs 1.5 lakh deduction under Section 80C
- Extra Rs 50,000 deduction under Section 80CCD(1B)
- Employer contribution tax-free up to 10% of salary (Section 80CCD(2))
- Maturity corpus is partly taxable (60% lump sum is tax-free, 40% must be used to buy annuity)
Mutual Funds:
- ELSS funds qualify for deduction up to Rs 1.5 lakh under Section 80C
- Capital gains taxed:
- Equity: LTCG above Rs 1 lakh taxed at 10%
- Debt: Indexed LTCG taxed at 20%
Verdict: If tax savings is your priority, NPS wins with an additional Rs 50,000 deduction and tax benefits on employer contributions.
Liquidity and Flexibility: How Easy is Accessing Your Money?
NPS:
- Withdrawal allowed at age 60
- Partial withdrawals (up to 25%) for specific needs like marriage, education, etc.
- Annuity purchase compulsory for 40% corpus
Mutual Funds:
- No lock-in (except ELSS – 3 years)
- Can redeem anytime
- SIPs can be paused or changed as per need
Verdict: Mutual funds are far more liquid and flexible, giving you control over your money at any time.
Risk Profile: Which One is Safer?
NPS:
- Equity exposure capped at 75%
- Risk is moderated by mix of government and corporate bonds
Mutual Funds:
- Risk varies by fund type
- Can invest in highly volatile small-cap funds or safe debt funds
If you’re risk-averse, NPS offers a stable, balanced approach. If you want high returns and are okay with volatility, mutual funds are better.
see also: Bank of India Closed This Special FD Scheme, Interest Rates Also Reduced
Who Should Invest in What?
| Investor Type | NPS Is Ideal If… | Mutual Funds Are Better If… |
|---|---|---|
| Young Professionals | Want long-term tax-saving retirement plan | Want wealth creation & flexibility |
| Salaried Employees | Employer contribution boosts savings | Want to create emergency fund |
| Conservative Investors | Prefer balanced equity-debt mix | Want debt funds with low risk |
| Tax Savers | Want full 80C + 80CCD(1B) benefit | ELSS can also save tax but limited to 80C |
NPS vs Mutual Funds FAQs
1. Can I invest in both NPS and mutual funds?
Yes, many investors combine both for tax savings (via NPS) and wealth creation (via mutual funds).
2. Which is better for retirement planning?
NPS is more structured for retirement due to lock-in, tax benefits, and annuity. But mutual funds can also be used if you prefer flexibility.
3. Is NPS risk-free?
No. Though it is more conservative than equity mutual funds, NPS carries market risks as part of the portfolio is in equity.
4. Can I change my mutual fund or NPS fund manager?
Yes, both allow changes. NPS allows changing pension fund managers once a year. Mutual funds can be switched anytime.
5. What is Tier I vs Tier II in NPS?
- Tier I is the default retirement account with tax benefits.
- Tier II is a voluntary savings account with no tax benefit or withdrawal restrictions.
