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Invest in MFs for liquidity and choice of funds.
Invest in NPS for the tax benefits, tax-free rebalancing, and for earmarked savings for retirement.
If one were to compare the category average returns of Tier-I equity plans of the National Pension System (NPS) with the direct plans of largecap mutual funds (MFs), the latter have a small edge currently.
Financial planners are of the opinion that investors should not choose between NPS and MFs based on returns alone.
MFs offer liquidity
MFs offer investors access to a wider range of assets (like gold and international funds), fund houses and fund managers. Barring ELSS, open-ended funds offer anytime liquidity.
The money put in MFs compounds without taxation. "No tax is levied when the fund manager sells his holdings," says Deepesh Raghaw, a Sebi-registered investment advisor.
Risk of depleting corpus
The flexibility to withdraw can be a double-edged sword.
"The retirement corpus can get depleted as the money can be used to meet short- or medium-term goals," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
Discipline can become an issue.
"Many investors enter when the market is high and exit when it is low," says Renu Maheshwari, Sebi RIA, co-founder and principal advisor, Finscholarz Wealth Managers.
The expense ratios of MFs are higher than the fund management charges in NPS, which are extremely low (0.03-0.09 per cent).
NPS: Exclusive tax benefit
This is a product specifically designed for retirement.
"The self-employed and business owners do not have access to Employees Provident Fund (EPF), but NPS is open to everyone," says Maheshwari.
Prior to NPS, other statutory retirement instruments like EPF were fixed-income oriented.
In tier-1 NPS, investors can enjoy equity exposure of up to 75 per cent.
Investors enjoy an exclusive tax benefit of Rs 50,000 from NPS under Section 80CCD (1B), apart from the Rs 1.5 lakh tax benefit under Section 80 CCE.
If the employer contributes to an employee's NPS account, the latter can claim a deduction under Section 80CCD(2) up to 10 per cent of salary within the Rs 1.5 lakh ceiling.
On retirement, 60 per cent of the corpus received as lump sum is tax-free.
"The 40 per cent that is annuitised provides income for life. And while annuity income is taxable, one's income usually tends to decline in retirement, so a lower tax rate applies," says Maheshwari.
Raghaw says that rebalancing from one fund to another is tax-free in NPS.
NPS: Low liquidity
The money gets locked in until 60. "If you retire early and need the NPS money, there is a problem. If you withdraw before 60, 80 per cent of the corpus must be annuitised," says Raghaw.
As for the 40 per cent that must be annuitised, if the annuity rates available at retirement are not good that can pose a problem (investors can defer withdrawal).
NPS offers a limited range of funds (there is only one equity fund; you don't have choices like large, mid and smallcap funds) and fund managers.
You can have both
Instead of choosing between MFs and NPS, investors who have the wherewithal should go for both.
Invest in MFs for liquidity and choice of funds. Invest in NPS for the tax benefits, tax-free rebalancing, and for earmarked savings for retirement.
If you have to pick one, go for MFs first. "How much you invest in NPS should depend on the amount you are comfortable locking in until 60," says Dhawan.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
