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NPS Vs. SIP: Which is Better Investment Plan?

Personal Finance

Retirement planning should be a priority for everyone. It is essential to save money in a disciplined manner to ensure that you have enough to support your expenses after you retire. The two most crucial aspects of retirement planning are beginning early and making investments that offer inflation-beating returns. Most individuals plan for retirement by contributing to the National Pension Scheme or a mutual fund SIP. This article will help you choose between the two options.

National Pension System

In 2004, the government initiated the National Pension Scheme, for government employees. In 2009, NPS was extended to private sector employees in India. You may take part in the program for as long as you work for the company. You may withdraw up to 40% of the entire corpus once you reach retirement age. The remaining 60% may be credited monthly, excluding the required annuity portion.

Flexible investment options under the NPS

When investing in the National Pension Scheme, you may do it whenever it is most convenient. Participants are not obligated to make regular payments to the plan. Low-risk NPS investments often don’t need a lot of initial capital. The maximum allocation that may go toward stocks and shares of stock is 75%. That means it will have a more gradual response to market shifts. The scheme’s profit potential and the pace of capital appreciation are both capped by this restriction.

Investment Options Under NPS

National Pension Scheme (NPS) investors may choose between two primary investing options: active choice investment and auto choice investment.

The first alternative allows you to invest in whatever assets you choose. It allows you to tailor your investment strategy to your risk appetite and long-term financial objectives. In the latter, the plan manager makes investment decisions based on your age group. Your portfolio’s risk would thus decrease as you get older.

Profits: The NPS is only moderately profitable as it does not invest in stocks and other equity shares. The average annual return on NPS funds is between 8% and 10%; however, it is still higher than other fixed-income investments.

Investment Allocation

You can allocate only 75% of NPS assets to purchase equity funds. This gradually reduces by 2.5% each year once you turn 60. This is with a view to decreasing your risk exposure as you grow older.


Strict withdrawal limitations apply until the plan matures or you reach retirement age.

You can withdraw up to 25% of your corpus for:

  • Medical expenses.
  • Education (a child’s)
  • Marriage (your own or that of a family member)
  • House purchase (or construction)

Also, you can withdraw at most three times over the program’s tenure, with a five-year waiting period between each withdrawal.

Mutual Fund Systematic Investment Plans

A systematic investment plan (SIP) allows you to invest in a certain mutual fund and get consistent returns. Mutual funds are pools of money from several investors used to make investments. These might be market-linked or fixed-income options.

SIP yields provide more lasting benefits than NPS incentives. With SIP’s use of compounding, an early investor in a diversified equity portfolio may save considerably over time. You may forget the stress of trying to time the market entirely with the SIP method. Investments in debt funds, also known as fixed-income funds, may provide larger returns with lower risk than equity funds.

Some of the features of a systematic investment plan are:

Consistent Savings

To participate in SIP plans, you must make monthly contributions to the fund of your choice. This disciplined approach to investing will help you develop more consistent spending patterns. You may begin investing with as little as 500 rupees and save a sizeable amount for your golden years.


The interest on a SIP account is compounded quarterly. The compounding effect causes your capital to grow exponentially. Say, Mr. A, now 40 years old, decides to start putting Rs. 500 each month into an ELSS fund that yields 14%. He plans to hang it up when he becomes 60 years old. Consequently, he has 20 years to see a return on his money. If he invested Rs. 1.2 lakh initially, over 20 years, he would have around Rs. 6.5 lakh in returns. Over 20 years, his investments will generate around a sixfold return.

The Typical Indian Rupee Price

Rupee cost averaging in SIP might be beneficial. You may use this feature to make a larger investment in a fund when the market is down and a smaller investment when the market is up.

Higher Profits

With SIP mutual funds, investors may expect substantially higher returns than NPS mutual funds. While the NPS does not directly invest in stocks or shares of equity, it may do so via mutual funds. In the long run, equity funds typically return between 14% and 18% but react to market volatility the same way as other investments.

Wider Choice

Mutual funds provide you access to a wide variety of investment opportunities. You can purchase stocks and equity shares via equity funds and ELSS. Hybrid funds are the best way to diversify your retirement portfolio.

Investing Made Easy

Easy-to-understand steps guide you throughout the SIP investment process. You can choose to link your bank account and agree to automate payments. The required investments will be debited from your account on the due date.


Except for ELSS funds, mutual fund investments have no time restrictions on withdrawals. To supplement your retirement savings, you might begin a systematic withdrawal plan after you have saved enough.


Your optimal investment option will depend on your risk tolerance. Also, how soon you want to retire, how long you want to invest and how much capital you want to build up. Mutual fund SIP investing is superior to the NPS if flexibility and liquidity are a priority. For more information and insights on investing, consult Piramal Finance.