Mutual Funds or NPS: Which one is Better to Get Higher Returns? Best Investment for Retirement Goal

Summary

In this video, we compare two popular long-term investment options: equity mutual funds and NPS Tier 1. Both investment vehicles have their merits, with mutual funds offering higher potential returns and greater flexibility, while NPS is a retirement-focused option with automatic portfolio adjustments as you approach retirement. The video highlights the importance of considering factors like liquidity, risk, and purpose when choosing between the two. Ultimately, investors can benefit from having both options in their portfolio for a balanced and diversified approach to long-term financial goals.

Takeaways

• 😀 NPS Tier 1 has delivered similar long-term returns to equity mutual funds, with average returns between 11.6% and 15.45%.
• 😀 NPS imposes a 75% equity cap on portfolio allocation, which limits the potential returns compared to mutual funds.
• 😀 Rolling returns were used to compare NPS and mutual funds, which reflect returns over 5-year periods for a more accurate long-term analysis.
• 😀 NPS is a government-backed retirement scheme, which automatically adjusts its portfolio to reduce risk as the investor ages.
• 😀 NPS withdrawals are restricted until the age of 60, making it more suitable for retirement goals, whereas mutual funds offer more liquidity for various long-term goals.
• 😀 Mutual funds allow flexibility for other long-term goals, such as saving for education, a home, or a child's marriage, without age-based restrictions.
• 😀 Both NPS and mutual funds are managed by professional fund managers, making them reliable options for investors.
• 😀 NPS provides an automatic portfolio allocation adjustment as the investor nears retirement age, which is a feature not available with mutual funds.
• 😀 Equity mutual funds are better suited for non-retirement long-term goals due to their flexibility and higher potential returns.
• 😀 You can invest in both NPS and mutual funds through a single platform like the ET Money app, with SIP options available for both.
• 😀 While NPS is mainly for retirement savings, mutual funds offer greater diversification and risk management for different long-term financial goals.

Q & A

What is the key difference between NPS Tier 1 and mutual funds?

The key difference lies in their purpose and structure. NPS Tier 1 is a government-backed retirement scheme with restrictions on withdrawals and equity exposure, whereas mutual funds are more flexible, can be used for various long-term goals, and have no withdrawal restrictions.

Why is the comparison of returns between NPS and mutual funds done using rolling returns?

Rolling returns provide a more comprehensive view of the performance over different time frames, helping to smooth out short-term fluctuations and offering a better understanding of long-term investment performance.

What does the 75% equity cap in NPS Tier 1 mean for investors?

The 75% cap means that an NPS Tier 1 investor cannot allocate more than 75% of their portfolio to equities, limiting their potential for higher returns from equities compared to mutual funds, which have no such cap.

How do the long-term returns of NPS compare to equity mutual funds?

Both NPS and equity mutual funds have shown decent long-term performance, with NPS delivering returns between 11.6% and 13.4%, and equity mutual funds offering returns between 11.67% and 15.45%.

Can mutual funds and NPS both be used to save for retirement?

Yes, both can be used for retirement saving. However, NPS is a dedicated retirement product with a focus on long-term retirement goals, while mutual funds offer flexibility and can also be used for retirement, along with other long-term goals.

What advantages does NPS have over mutual funds for retirement planning?

NPS provides a structured, government-backed approach to retirement savings, with automatic portfolio rebalancing as the investor ages, making it a safer option for retirement planning compared to the more flexible but riskier mutual funds.

What are the liquidity differences between NPS and mutual funds?

NPS has restrictions on withdrawals, only allowing them after the age of 60, while mutual funds offer complete liquidity and can be withdrawn or accessed at any time without age restrictions.

Is it better to invest in NPS or mutual funds for a child's higher education?

Mutual funds are a better option for goals like higher education as they offer liquidity and flexibility, unlike NPS, which is designed primarily for retirement and has withdrawal restrictions.

Can you invest in both NPS and mutual funds simultaneously?

Yes, it is possible to invest in both NPS and mutual funds simultaneously. In fact, diversifying investments across both can help manage risk and liquidity better.

How can I easily manage investments in both NPS and mutual funds?

You can manage investments in both NPS and mutual funds through a single platform like the ET Money app, which also allows you to invest via SIP (Systematic Investment Plan) in both instruments.