NPS vs Mutual Funds: Which Investment Can Give You More Returns in the Long Run?

April 21, 2025 By: Shalini Bhardwaj

When it comes to saving for the future, especially for retirement or long-term goals, Indian investors often find themselves stuck between two powerful options — NPS (National Pension System) and mutual funds. Both are designed to help you build wealth over time, but they work differently and offer unique advantages.

The big question is — which one can give better returns, and which one suits your personal financial goals?

In this article, we’ll break down both investment options, compare their features, returns, tax benefits, and risks to help you decide where your money can grow smarter.

What is NPS (National Pension System)?

NPS is a government-backed retirement savings scheme managed by the Pension Fund Regulatory and Development Authority (PFRDA). It is aimed at encouraging individuals to invest regularly for retirement.

When you invest in NPS, your money is managed by professional fund managers and split between:

• Equity (E)
• Corporate debt (C)
• Government bonds (G)
• Alternative investments (A) (in Tier 2)

You can choose how your money is allocated or let the system manage it for you automatically (auto choice).

At retirement (age 60), you can:

• Withdraw 60% of the total amount tax-free
• Use 40% to buy an annuity (monthly pension) – this part is taxable

What are Mutual Funds?

Mutual funds are market-linked investments where your money is pooled with other investors and managed by professional fund managers to invest in:

• Stocks (equity funds)
• Bonds (debt funds)
• A mix of both (hybrid funds)

You can choose a mutual fund based on your goals:

• Short-term or long-term
• Low risk or high return
• Tax saving (ELSS)
• Monthly income or capital growth

Mutual funds offer full liquidity, meaning you can withdraw your money any time (except in locked funds like ELSS).

NPS vs Mutual Funds: Key Differences

Let’s compare NPS and mutual funds based on some important parameters:

Feature	NPS	Mutual Funds
Returns	8%–10% (historically)	10%–15% (varies by fund type & risk)
Tax Benefits	Up to ₹2 lakh under Sec 80C & 80CCD(1B)	₹1.5 lakh under 80C (only for ELSS)
Liquidity	Locked till 60 years (partial after 3 yrs)	Highly liquid (except ELSS – 3-year lock)
Maturity Withdrawal	60% tax-free, 40% annuity (taxable)	Fully flexible and taxable as capital gains
Risk Level	Low to moderate (limited equity exposure)	Varies from low (debt) to high (equity)
Control & Choice	Limited (especially in auto choice)	High control — choose fund, theme, risk
Retirement Focused?	Yes, designed for long-term retirement	Not retirement-specific, but flexible use

Who Can Earn Better Returns: NPS or Mutual Funds?

📈 Returns Potential

Mutual funds generally offer higher returns over long periods, especially equity mutual funds. Historically, many equity funds have given 12–15% annual returns over 10–15 years.

NPS returns have ranged between 8–10%, depending on asset allocation and fund manager. Equity exposure in NPS is capped at 75%, so even in the best years, NPS may not beat aggressive mutual funds.

Verdict:
For higher returns, mutual funds — especially equity funds — have an edge.

Tax Benefits: NPS Has the Upper Hand

💰 NPS:

• Deduction up to ₹1.5 lakh under Section 80C
• Additional ₹50,000 under Section 80CCD(1B) (exclusive to NPS)
• At maturity, 60% is tax-free, but 40% goes into annuity, which is taxable

💰 Mutual Funds:

• Only ELSS (Equity Linked Saving Scheme) qualifies for 80C benefit up to ₹1.5 lakh
• Long-term capital gains (after 1 year) taxed at 10% (above ₹1 lakh)
• Short-term capital gains (less than 1 year) taxed at 15%

Verdict:
For tax savings, NPS offers greater tax benefits, especially with the extra ₹50,000 under 80CCD(1B).

Flexibility & Liquidity: Mutual Funds Win Clearly

🔓 NPS:

• Money is locked till retirement
• Can withdraw only 25% for specific reasons before 60 (marriage, education, medical, etc.)
• Compulsory to buy annuity with 40% of corpus

🔓 Mutual Funds:

• Can be withdrawn anytime, no restrictions
• Partial or full exit is allowed whenever needed
• No compulsion to invest in annuity

Verdict:
For flexibility and liquidity, mutual funds outperform NPS.

Risk and Stability: Depends on Your Profile

🛡️ NPS:

• Offers stable returns with limited market risk
• Better for conservative investors or those nearing retirement

🎯 Mutual Funds:

• Equity funds are volatile but high return
• Debt funds are safer but give lower returns
• Offers a wide range to suit every risk appetite

Verdict:
For low-risk, long-term investors, NPS is safer. But for young investors looking for growth, mutual funds are better.

Which One Is Better for Retirement Planning?

👴 NPS:

• Built for retirement with regular contributions and disciplined savings
• Less temptation to withdraw
• Government-supported and regulated

🧓 Mutual Funds:

• Can be used to build a retirement corpus with SIPs in equity or hybrid funds
• You need to have self-discipline to stay invested
• Option to switch between funds if needed

Verdict:
If your sole goal is retirement with discipline, go for NPS. But if you want flexibility and higher wealth creation, mutual funds (especially SIPs in equity funds) are more rewarding.

What Should You Choose: NPS or Mutual Funds?

The answer depends on your goals, age, risk profile, and discipline.

✅ Choose NPS if:

• You want a safe and disciplined retirement plan
• You are looking for extra tax benefits
• You don’t mind a long-term lock-in till age 60
• You prefer moderate returns with less market exposure

✅ Choose Mutual Funds if:

• You want higher returns and flexibility
• You can manage risk and stay invested long-term
• You’re saving for multiple goals, not just retirement
• You need access to funds during emergencies

💡 Smart Strategy: Combine Both

Why choose one when you can benefit from both?

• Use NPS for guaranteed retirement savings and extra tax deductions
• Use mutual funds to grow wealth faster for other life goals like buying a house, children’s education, or early retirement

Start SIP in mutual funds for flexibility and contribute regularly to NPS for disciplined savings.

Final Word

NPS and mutual funds both have their pros and cons. While NPS ensures security and tax efficiency, mutual funds give you the power of compounding, flexibility, and faster wealth creation. The best strategy is to align your investments with your life goals and risk capacity.

By mixing both, you can enjoy the best of both worlds — stability with growth, and discipline with freedom.