National pension system v/s debt mutual funds: Which is better?
What's the story
In India, retirement planning is a crucial financial goal for many. Two popular options are the National Pension System (NPS) and debt mutual funds. Both have their own benefits and drawbacks, which can affect your long-term savings. Knowing the difference between the two can help you make an informed decision about where to invest your money for retirement. Here's a look at both.
NPS overview
Understanding National Pension System
The National Pension System is a government-backed retirement savings scheme. It encourages individuals to invest a part of their income regularly until retirement. The NPS offers tax benefits and guarantees a minimum return. However, it also has certain restrictions on withdrawal before retirement age, which is usually 60 years.
Debt funds insight
Debt mutual funds explained
Debt mutual funds invest in fixed-income securities like government bonds, corporate debentures, and so on. They are less risky than equity funds and provide more liquidity than the NPS. Investors can withdraw their investments at any time, subject to exit loads if they redeem within a certain period. However, returns are not guaranteed like in NPS.
Return analysis
Comparing returns and risks
NPS typically offers returns between 8% and 10%, depending on market conditions and asset allocation strategies employed by fund managers. Debt mutual funds usually yield around six to eight percent but are subject to market fluctuations. While NPS guarantees minimum returns, debt funds may offer higher returns but with more risk.
Tax benefits
Tax implications of each option
Both NPS and debt mutual funds offer tax benefits under Section 80C of the Income Tax Act. However, NPS has an additional tax benefit on the employer's contribution up to 10% of basic salary. Debt mutual funds are taxed according to capital gains tax rules, which depend on how long the investment is held.
Accessing funds
Liquidity considerations
One major difference between NPS and debt mutual funds is liquidity. While debt mutual funds allow you to access your money whenever you want after a lock-in period, NPS has strict withdrawal rules before retirement age. This makes debt mutual funds a more flexible option for those who may need access to their savings before retiring.