NPS or Equity Mutual funds for Retirement?

I keep getting queries like ‘Is NPS good?’ ‘Can we invest in NPS for retirement?’ ‘Is NPS better or Equity mutual funds better?’ I thought of answering these questions through this write-up. However, let me clarify that this is not a comprehensive write-up on NPS.

NPS (National Pension System)

The National Pension System is a defined-contribution pension system in India regulated by the Pension Fund Regulatory and Development Authority. NPS is basically to encourage you to save for your retirement.

Let’s look at the returns delivered by different NPS schemes in the Equity category. Equity means shares and we are interested in this category only because equity category generates better returns than other categories in the long-term.

Pension Fund	CAGR 3 years	CAGR 5 years	CAGR 10 years
Aditya Birla Sun Life Pension Management Ltd	18.16%	16.15%	NA
HDFC Pension Management Co. Ltd.	18.3%	16.57%	14.81%
ICICI Pru. Pension Fund Mgmt Co. Ltd.	19.98%	16.91%	14.66%
Kotak Mahindra Pension Fund Ltd.	19.68%	16.85%	14.62%
SBI Pension Funds Pvt. Ltd	18.28%	15.31%	13.98%
UTI Retirement Solutions Ltd.	19.61%	16.55%	14.76%

CAGR – Compounded Annual Growth Rate

Without any doubt, NPS has delivered good returns. Now, let’s check the returns delivered by various Equity mutual fund schemes.

Equity Mutual funds

Scheme name	CAGR 3 years	CAGR 5 years	CAGR 10 years
Invesco India Multicap Fund	20.3%	20%	18%
Invesco India Midcap Fund	24%	23.5%	20.2%
Mirae Asset Midcap Fund	22.6%	-	-
Mirae Asset Large & Midcap Fund	17.3%	20.8%	22%
Mahindra Manulife Midcap Fund	26.4%	26.5%	-
PGIM India Midcap opportunities Fund	18%	26%	17.8%
Quant Midcap Fund	31.8%	33%	20.3%
Parag Parikh Flexicap Fund	20.5%	23.6%	19%
ICICI Pru Value Discovery Fund	24.2%	23%	18.4%
HDFC Midcap Opportunities Fund	28%	24.8%	21%
DSP Midcap Fund	16.7%	18.8%	18.7%
Bank of India Mid and Small cap equity & debt fund	22.8%	22.8%	-
Union Midcap Fund	23.1%	-	-

You can observe from the above tables that Equity mutual fund schemes have delivered better returns than NPS funds over different time horizons.

Withdrawal in NPS

You can withdraw up to 60% of the NPS corpus as lumpsum upon attaining superannuation age (60 years). The remaining 40% must be used to purchase an annuity plan offered by NPS. However, 100% is allowed if the total accumulated corpus is upto Rs 5 lakh. Coming to the annuity plan that is offered by NPS, the payout % (p.a %) might be relatively low because of investment in conservative products such as govt. bonds and corporate bonds. I am not sure of this. This is my thinking.

Withdrawal from Retirement corpus created in Equity mutual funds

You can start SWP (Systematic Withdrawal Plan) from these Equity mutual fund schemes after retirement to receive fixed monthly income. I have shared an illustration of SWP in a previous write-up. You can refer to that write-up for more details about SWP.

Conclusion:

1.  NPS, because of its inherent lock-in till retirement creates a discipline in investors to continue investing and stay invested for long-term till retirement.

2.  From the perspective of returns and flexibility in withdrawal, Equity mutual funds scores over NPS funds.

3.  If you have the iron discipline to invest for long-term without premature withdrawals, then Equity MFs may be a better option. Or if you have a person guiding you with your personal finance keeping your emotions and biases in check like Sri Krishna guided Arjuna, then also Equity MFs may be a better option for you.

Disclaimer:

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.