When it comes to long-term financial planning, especially for retirement, two names dominate most conversations in India: the National Pension System (NPS) and mutual funds. Both are popular choices among investors looking for growth, security, and tax efficiency. But with changing market dynamics in 2025, how do you decide which one suits your needs better?
Before You Invest: NPS Vs Mutual Funds - The Essential 2025 Checklist
When weighing NPS vs mutual fund, it's clear that both serve different purposes. Mutual funds offer flexibility, variety, and liquidity. But if retirement planning, tax-saving, and disciplined long-term wealth creation are your priorities, NPS stands out.
Sponsored Content
Let’s walk through a clear, well-structured checklist that compares NPS vs mutual fund on critical aspects, from returns to tax benefits, flexibility, and long-term suitability.
Compare Recent Performance Across Timeframes
Performance alone doesn’t define the best product, but it's a good place to begin. Here’s a look at how leading NPS schemes and large-cap mutual funds have fared recently, based on data from 26th June 2025:
Duration |
Top NPS Returns (Tier I Equity) |
Top Mutual Fund Returns (Large-Cap) |
1 Year |
DSP – 16.59% Kotak – 7.10% HDFC – 6.04% |
WhiteOak – 10.58% Canara Robeco – 10.06% ITI – 3.24% |
3 Years |
Kotak – 21.88% ICICI – 21.76% UTI – 21.78% |
HSBC – 20.67% Bank of India – 21.50% Canara Robeco – 21.79% |
5 Years |
ICICI – 22.71% UTI – 22.84% Kotak – 22.48% |
HSBC – 20.58% Bank of India – 21.50% Canara Robeco – 22.14% |
10 Years |
UTI – 14.16% HDFC – 13.59% ICICI – 13.56% |
Canara Robeco – 15.28% Axis – 13.48% HSBC – 13.17% |
Understand the Core Purpose
NPS:
Designed primarily for retirement planning.
Encourages disciplined investing with lock-in until age 60 (Tier I).
A mix of equity, corporate bonds, and government securities for balanced growth.
Mutual Funds:
Offers freedom for short, medium and long-term investing.
No restriction on withdrawals (except ELSS).
Variety of categories: equity, hybrid, debt, thematic, etc.
Tax Efficiency: What Do You Save?
NPS Tax Benefits:
Up to ₹1.5 lakh under Section 80C.
Additional ₹50,000 under Section 80CCD(1B).
Partial withdrawals (up to 60% at retirement) are tax-free. You need to use the remaining 40% of the corpus to buy an annuity plan. The regular income that you will receive from the annuity is taxable. The tax will be calculated as per your income tax slab.
Mutual Fund Taxation (Equity Funds):
Long-Term Capital Gains (LTCG) above ₹1.25 lakh are taxed at 12.5%.
Short-Term Capital Gains (STCG) are taxed at 20%.
Flexibility and Liquidity
Feature |
NPS |
Mutual Funds |
Lock-in Period |
Tier I: till retirement age |
Most have no lock-in (except ELSS – 3 yrs) |
Withdrawals |
Allowed after 3 years in special cases |
Fully liquid (can redeem at any time) |
Fund Switching |
Limited (twice a year) |
Unlimited within the fund house |
Investment Frequency |
Flexible but not daily SIPs |
Monthly SIPs/ STPs are possible |
Discipline vs Flexibility: What Works Better?
Mutual funds suit proactive investors who can monitor and rebalance portfolios regularly.
NPS, with its limited switching and restricted access, is ideal for hands-off investors looking for structured retirement outcomes.
Conclusion
When weighing NPS vs mutual fund, it's clear that both serve different purposes. Mutual funds offer flexibility, variety, and liquidity. They’re perfect for people who want control over their investment horizon and style.
But if retirement planning, tax-saving, and disciplined long-term wealth creation are your top priorities, NPS stands out. The low cost, attractive tax breaks, and reliable long-term performance make it a powerful choice for Indian investors preparing for the future.
FAQs
1. Which is safer, NPS or mutual funds?
NPS invests in a mix of equity, debt, and government securities with controlled exposure to risk. Mutual funds vary widely in risk depending on the type. For retirement goals, NPS is structured to be more stable.
2. Can I invest in both NPS and mutual funds?
Yes, you can. Many investors use NPS for retirement and mutual funds for wealth creation or other goals. It’s about matching each product with your financial needs.
3. Is NPS better for tax saving than mutual funds?
NPS offers an additional ₹50,000 tax deduction under Section 80CCD(1B), which mutual funds (even ELSS) do not. This makes NPS more tax-efficient for those seeking maximum deductions.
4. How often can I switch funds in NPS?
In Tier I NPS accounts, you can switch fund managers or asset allocation up to two times a year. This is limited compared to mutual funds, where switches are more frequent and flexible.
5. What happens to my NPS investment after I turn 60?
You can withdraw up to 60% of your NPS corpus tax-free and use the remaining 40% to buy an annuity. This ensures regular income post-retirement, making NPS a structured solution for retirement.
Advertisement
Disclaimer: This is a sponsored article. All possible measures have been taken to ensure accuracy, reliability, timeliness and authenticity of the information; however Outlookindia.com does not take any liability for the same. Using of any information provided in the article is solely at the viewers’ discretion.
Published At: