Can NPS returns be better than mutual funds over the long run?

When planning for the future, every investor asks the same question: Where should I put my money for the best long term returns? If you’re considering retirement planning, you must have come across the National Pension System (NPS) and mutual funds. But can NPS beat mutual funds over time, or does it fall short? Let’s explain this in an easy way.

But before we jump into returns, it’s important to understand how both works.

• NPS is a government backed retirement savings scheme that allows individuals to invest in a mix of equity, corporate bonds and government securities. It comes with tax benefits and is known for its long term stability.
• Mutual Funds, on the other hand are market driven investments managed by fund houses. They offer flexibility, higher liquidity and various risk levels depending on the type of fund (equity, debt, or hybrid).

Both are designed to grow your wealth, but they function differently.

Comparing NPS and mutual funds for long term growth

1. Market exposure and risk

• NPS has a cap on equity exposure (maximum 75% in equity funds), which means it cannot fully take advantage of stock market highs. Over time, this portion reduces as you age.
• Mutual funds especially equity mutual funds have no such cap. If you invest in aggressive equity funds, they can potentially deliver higher returns, assuming market conditions are favourable.
• If you’re looking for more stability with lower risk, then NPS may be a better choice. But if you’re okay with volatility for potentially higher gains then mutual funds might suit you better.

1. Past performance comparison

• Historically, well-performing equity mutual funds have delivered 12–15% annual returns over the long term.
• NPS with its regulated structure and mix of equity and debt has averaged around 9–12% returns depending on fund allocation and market cycles.
• This means that in a strong market, equity mutual funds may outperform NPS. But during downturns, NPS may provide more stability due to its mix of assets.

1. Tax benefits and lock-in period

• One big reason investors consider NPS is tax savings. Under Section 80CCD (1) and 80CCD (1B), you can claim deductions up to ₹2 lakh annually.
• On the other hand, equity mutual funds are taxed at 10% on long-term capital gains exceeding ₹1 lakh.
• NPS has a strict lock-in period until the age of 60 unless there is some medical urgency, marriage, education or home purchase. Whereas mutual funds allow withdrawals anytime though some funds have exit loads.
• If you want long term tax efficiency, then NPS may be appealing. But if you value liquidity and flexibility then mutual funds may be better.

1. Withdrawal rules and annuity factor

• When you retire, NPS mandates that 40% of your corpus must be used to buy an annuity, ensuring a steady pension. Only 60% can be withdrawn tax free.
• In contrast, mutual funds give you complete control where you can withdraw your entire corpus or keep investing as per your needs.
• If you prefer a structured pension plan post-retirement, then NPS makes sense. But if you want full access to your money, mutual funds provide that.

Can NPS deliver better returns in the long run?

There’s no universal answer—it’s about what works for you.

• In a conservative scenario where stability and disciplined investing are prioritised, NPS can be a strong performer. The mix of equity and debt ensures steady growth while reducing risk.
• In an aggressive growth scenario, mutual funds have an advantage because they offer full equity exposure without limits which helps maximise returns.
• In fluctuating markets, NPS may protect against extreme downturns better than mutual funds due to its controlled asset allocation.

A practical approach it to use both—NPS for disciplined retirement savings and mutual funds for wealth creation. That way, you get tax benefits, a pension and the flexibility to enjoy your investments. Whichever you choose, start early. The sooner you invest, the more your money grows over time.

FAQs

1. What happens if I stop contributing to NPS?

Your account will become inactive, but you can reactivate it by making a minimum contribution and paying a penalty. Keep in mind that long gaps can affect your retirement corpus.

1. Are mutual funds riskier than NPS?

Generally, yes. Mutual funds especially equity ones are market driven and more volatile, whereas NPS has a mix of assets to balance risk.

1. Which option is better for tax savings?

NPS offers additional tax benefits over mutual funds under Section 80CCD(1B) which makes it attractive for tax conscious investors.

1. What are the NPS eligibility criteria?

Any Indian citizen between the ages of 18 and 70 can open an NPS account. NRIs and OCIs can also invest, subject to RBI guidelines.