Difference between NPS vs SIP

Both the National Pension Scheme (NPS) and the Systematic Investment Plan (SIP) help you grow wealth and plan for your retirement. However, both have different investment goals and the nature of the investment.

Hence, choosing between NPS vs SIP can be confusing for you if you do not have any investment goals. Let us understand the key differences between NPS and mutual fund SIP, which is better for you, knowing their benefits, returns, risks, and liquidity.

What is an NPS?

The NPS is an initiative designed by the government of India which provides retirement income to citizens. The Pension Fund Regulatory and Development Authority (PFRDA) oversees the scheme, ensuring transparency of your investments. With NPS, you can invest in a pension account during the course of your employment.

The NPS offers two types of accounts, Tier-I and Tier-II. The Tier-I account is a pension account that has restrictions on withdrawals. Conversely, the Tier-II account is just a voluntary savings account which allows for withdrawing funds freely.

Essential Features of NPS

1. Low-Risk Option

   NPS invest 75% of the funds towards stocks or equity shares. As a result, the volatility from market fluctuations will have less impact on the scheme. However, this feature also restricts the profit-yielding capacity.

2. Compounding Returns for Long-Term

   Investing in the NPS from the early 20s to 60 years of age can result in good growth due to compounding. Employees can withdraw a maximum of 60% of their corpus as a lump sum after their retirement if their corpus is more than INR 5 lakh. You can use the remaining 40% to purchase an annuity for a monthly pension.

   However, you can withdraw 100% of your corpus if your corpus is equal to or up to INR 5 lakh.

3. Investment Flexibility

   The NPS does not state that you should invest monthly in the scheme. You can invest in NPS whenever possible, as per your convenience. However, you must invest INR 1000 per year for Tier-I and INR 500 and INR 250 for account opening of both Tier-I and Tier-II accounts, respectively.

4. Early Withdrawal

   NPS also allows you to withdraw 25% of your corpus anytime for reasons such as medical treatments, children’s education or marriage, purchasing or building a house, and many more.

What is an SIP?

An SIP is a systematic procedure of investing in mutual funds. This facilitates the periodic investments of a small fixed amount in your mutual fund scheme every month or quarter. Just like lump sum investments, mutual funds SIP accumulate funds from you and use them to purchase securities at each interval.

These securities include either market-linked securities like equities and stocks or fixed-income securities like debentures, bills and bonds.

Essential Features of SIP

1. Periodic Investment

   SIP allows you to invest a particular amount in your chosen mutual fund plan. This fosters disciplined investing and consistent expenditure.

2. Low Investment Option

   You can invest as low as INR 100 in SIPs. This eases the financial burden on you and helps you build your post-retirement corpus freely.

3. Rupee-Cost Averaging

   SIP also allows you to take advantage of the rupee cost averaging. This means you can buy more units of a fund when the market is down, and sell them when the market is at its peak. This feature reduces the cost per unit of funds and helps you avail a higher profit margin.

4. Compounding Returns

   With SIP, the interest on the same is compounded quarterly. This compounding feature increases your investment corpus exponentially.

   If you are looking to invest in mutual funds, download the PL Capital Group – Prabhudas Lilladher application and choose the fund which suits your investment goals. You can also open a Demat account for free with PL.

SIP vs NPS – Key Differences That Set Them Apart

Since you know both the features of NPS and SIP, let  us evaluate the differences between these two in the table below:

NPS vs SIP – Which is Better?

Based on the above key differences, choosing between an NPS or a mutual fund SIP is completely based on your investment goals and liquidity considerations.

If you are planning only to build a retirement corpus with tax benefits, long-term lock-in period options and moderate returns, NPS is the best option for you.

However, if you want flexibility while building your investment corpus, varied return exposure and moderate risk, you can choose SIPs. You can even invest for 1 or 2 months while choosing SIP.

Final Thought

Understanding the differences between NPS vs SIP helps you choose between these two investment options. While NPS is particularly designed for retirement purposes, a mutual fund SIP helps invest in mutual funds at regular intervals.

NPS invests the funds in asset classes like government securities, equities, and corporate bonds. Conversely, SIP allows for investment in debt funds, equity funds, and hybrid funds.

Using the PL application, you can select your preferred mutual fund schemes and start SIP on a particular date.

Frequently Asked Questions

1. Does investing in NPS provide more safety than SIP?

Yes, NPS is a safer investment option than a mutual fund SIP since it is comparatively less volatile than SIPs.

2. How does the return on NPS differ from SIP?

The returns from NPS depend on the asset class and proportion of investment, whereas the returns from mutual fund SIP depend on the performance of the market and the fund house.

3. What are the tax advantages of NPS and SIP?

In case of NPS, you can claim a tax deduction of up to INR 1.5 lakh under Section 80C and an additional INR 50,000 under Section 80CCD(1B) in a financial year. On retirement, you are allowed to withdraw 60% of the corpus without paying taxes.

In a mutual fund SIP, you are eligible for a tax deduction of up to INR 1.5 lakh per year.

4. Which investment option is a better retirement plan between NPS and SIP?

NPS is appropriate for long-term retirement planning with tax benefits.