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NPS Tier 2 vs Mutual Fund: Ensure THIS before making investing decision | Pension calculator, scheme, returns

NPS calculator, scheme, returns Tier 2 vs Mutual Fund: The one government scheme that has witnessed year-on-year growth is the National Pension System (NPS). The pension cum investment option brings an attractive long term saving avenue to effectively plan your retirement through safe and regulated market-based return. At the same time, SIP has gained a lot of popularity among mutual fund investors over the years and a lot of comparisons are being  made over investment options between Tier-II of NPS and mutual funds. But before we take a deep dive into the better investing option for the investors, let’s first understand the two. 

If you’re an investor seeking for low-cost investing opportunities where you can get a tax deduction, have freedom in withdrawing your money, and have a number of options to choose from, NPS and mutual funds are two great choices. NPS may be tier 1 or tier 2, however today we will contrast tier 2 NPS with mutual funds to discover which performs well under various investing requirements.

The NPS Tier 2 has the lowest management costs of any pension programme. As the account maintenance is low, the benefit of accumulated pension wealth to the subscriber becomes larger.  Only Indian citizens who are 18 to 60 years old may open a Tier 2 account, with minimum amount of Rs 1,000. The NPS Tier 2 account is entirely optional. To open a Tier 2 account, a customer must have an NPS Tier 1 account.   


National Pension System (NPS)


The Scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA).National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS. A person willing to open NPS Tier II account needs to first open the NPS Tier I account. 


NPS Tier II account


Tier I is mandatory retirement account, whereas Tier II is a voluntary saving Account associated with your Permanent Retirement Account Number (PRAN). Tier II acts like a mutual fund account with no lock-in period. Tier II offers greater flexibility in terms of withdrawal, unlike Tier I account, you can withdraw from your Tier II account at any point of time. There is no minimum balance required for keeping the account and the account holder can transfer the fund to pension fund i.e. Tier I any time. A person can exit Tier II any time without having to pay exit load, moreover, there are options to select different investment pattern from Tier 1. However, there are no tax benefits for Tier II account unlike Tier I. The NPS Tier 2 account offers access to four asset classes: alternative investment funds, corporate bonds, government securities, and stock.Historical average returns are in the range of 9% to 12%. 

Mutual fund


An investment fund that pools money from many investors to purchase securities. The advantages of mutual funds include  diversification, liquidity, and professional management.

NPS Tier 2 vs Mutual Fund


The main difference is ease of use. Mutual fund scores over this with a good UI platform, and easy to invest options. NPS provides option between auto and active choice. Auto choice is helpful to those who have limited equity and market knowledge. Fund regulators of NPS manage their funds in this case. However, person with market knowledge can opt for active choice and can direct funds accordingly. 

Whereas Equity mutual funds shows no such choice and a heavy portfolio percentage is invested in equities. Equity mutual funds are prone to market risks but they perform better over extended period. While there are no tax benefits in Tier II account, ELSS qualify for tax exemptions of up to Rs 1.5 lakh under Section 80C. In both Tier II and mutual funds, there are no restrictions on withdrawals.


NPS calculator


Investment- Rs 10,000 every month 

Investment start age – 25 years

Investment life –  35 years (till the age of 60 years)

Assuming an annual return – 10%

Total investment – Rs 42,00,000 

Total Corpus – Rs 3,82,82, 768

Expected monthly pension – Rs 1,14, 848


As an illustration, a 25-year-old is investing Rs 10,000 each month for the next 35 years in NPS (i.e., till the age of 60 years). The total NPS investment will increase to Rs 3,82,82,768 at maturity assuming 



There are numerous options for investors in the market today which makes it crucial to select an option which suits them best as there can be no one criterion that fits all. An investor can take decision based on their goal, market knowledge and investment capacity. NPS is a good option for those looking at a handsome retirement corpus with higher interests from both Tier I and Tier II accounts. Mutual funds suits those looking for a diversified investment pool over an extended period of time. 

Pranit Arora, Co Founder & CEO of Univest said, “mutual funds are a wise choice for investors who want to diversify their holdings. A mutual fund invests in a variety of securities rather than betting everything on one business or sector in an effort to reduce the risk of your portfolio.” Mutual fund SIP investments can be initiated with as little as Rs. 500. Therefore, based on one’s risk appetite, one can choose to invest in any mutual fund ranging from Equity, Debt, Hybrid, Gold, and Index. Equity mutual funds have the potential to outperform the NPS over time with certain amount of calculated risk. 

There are no tax exemptions for any other mutual funds. Additionally, there is no lock-in for NPS Tier 2 and it can be withdrawn whenever you want. However, there may be an exit load when withdrawing from mutual funds in some situations, despite the fact that it has high liquidity.What’s gives NPS the edge is the fund management charge is much lower than mutual funds. All across the world, countries are facing higher inflation since the waning of the pandemic and also due to geo political situations. So, it can be concluded that NPS can be more helpful to build retirement corpus over time, while mutual funds are more suitable to accumulate funds for specific goals along the way till retirement.




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