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NPS Vs SIP: Which is Better Investment Plan

4 Mins 17 Feb 2022 0 COMMENT


For an adequately funded retirement, you need to carefully invest your savings during the working years of your life. Two popular retirement investment options are - NPS (National Pension Scheme) and SIP (Systematic Investment Plan), which is a medium of investing in mutual fund schemes.

Both investments offer market-based returns, tax advantages and flexibility of investment. However, there are significant differences between the two. To know which investment option best fits your needs, understand each in detail.

What is NPS?

NPS is a voluntary, government-backed, defined contribution scheme where all residents and non-resident Indians can contribute a fixed sum during their working years.

In NPS, your savings are invested in a diversified portfolio of securities, comprising shares, government bonds, corporate bonds and alternative assets (such as real estate investment funds, etc.). You cannot allocate more than 75% of your corpus in equity.

NPS is regulated by the Pension Fund Regulatory Development Authority of India (PFRDA).

Additional Read: NPS Investments Tax Benefits

What is the benefit of NPS investment?

  • Easy and convenient: You can open an NPS account online at eNPS (https://enps.nsdl.com/eNPS/) or visit any of the authorised POPs (Point of Presence) entities. You can invest and manage your NPS account through the eNPS portal.
  • Voluntary: You can contribute during the financial year and increase or decrease the sum annually.
  • Flexibility: You get to choose from a wide array of pension funds to create a portfolio as per your risk tolerance and financial objectives. You can also switch your fund if you are not satisfied with the performance.
  • Contained risk: NPS schemes limit your equity exposure to 75% of the corpus. That controls your market volatility risk. The equity exposure is further reduced when you near your retirement age. However, it also limits the yielding capacity of your portfolio.
  • Attractive returns: NPS schemes generate average returns between 8-10% annually.
  • Transparency: The NPS programme is regulated and managed by PFRDA. This entity periodically monitors and reviews the performance of fund managers and ensures transparent investment norms.
  • Low cost: NPS has the lowest account management charges as compared to other pension schemes.
  • Tax benefits: NPS investments up to Rs. 1.5 lakhs per annum are tax-exempt under Section 80C of the Income Tax Act, 1961. You get further tax deduction of up to Rs. 50,000 per annum under Section 80CCD (1B).  

What is SIP?

SIP is an investment route for mutual funds where you contribute a fixed amount at defined intervals. By investing a small sum regularly, you can benefit from the rupee cost averaging method and inculcate the habit of disciplined savings.

Mutual funds allocate your money across different market securities, including equity, bonds, gold, etc., as per the joint investment mandate. Professional fund managers manage these funds in return for an annual management fee (also known as an expense ratio).

All mutual funds are registered and regulated by the Securities Exchange Board of India (SEBI).

What are the benefits of investing in mutual funds through SIP?

  • Investing ease: You can invest online in a scheme of your choice with minimal documentation and auto deductions from an authorised bank account. Further, mutual funds do not have a strict lock-in period. However, tax deductions are available only after you meet the three-year lock-in period for ELSS (Equity Linked Saving Scheme).
  • Flexibility: You can choose a mutual fund per your risk tolerance and financial objective. You can also rebalance your portfolio and change asset allocation.
  • Minimal investment: In the SIP mode, you contribute a fixed amount, as low as Rs. 500 per sum, at defined intervals for a definite period.
  • Professional fund management: Mutual funds are managed by professionals who have in-depth market understanding and knowledge.
  • Attractive returns: Mutual funds generate average returns between 12-15% annually. Long term SIP investments create more wealth because of the power of compounding.
  • Rupee cost averaging: Mutual fund investments through SIP decrease the cost per unit by investing across market cycles and conditions.
  • Tax benefits: ELSS investments up to Rs. 1.5 lakhs are tax-free under Section 80C.


Point of Difference



Lock-in period

Until 60 years or retirement

No lock-in period. Only ELSS funds have a three-year lock-in period.

Average returns

Between 8%-10%

Between 12%-15%


Contained risk due to limited equity exposure

Subject to market risk. However, you can modify your risk appetite.

Equity exposure

Limited to 75%

No limit. Depends on investor preference

Minimum investment

Rs. 6,000

Rs. 500

Maximum investment

No limit

No limit

Investment period

Until retirement

No fixed duration

Premature withdrawals

Only 20% of the corpus after paying taxes

No restrictions on withdrawals, except for ELSS lock-in period schemes

Taxes on returns

No taxes on returns

Returns are subject to short- and long-term capital gain taxes

Tax benefits

Eligible for benefits under Section 80C and 880CCD (1B)

ELSS funds are eligible for benefits under Section 80C

Read Also: Lumpsum vs SIP


Both NPS and SIP investments have their advantages and drawbacks. The ultimate choice depends on your risk tolerance, investment horizon and financial objective. If you have a moderate risk appetite and want to save for retirement, you can opt for NPS. However, if you want the ease of investment and fulfil short-term and long-term goals with inflation-beating returns, you can invest in mutual funds through the SIP mode.


NPS vs SIP. Which is a better investment option?

Well, there is no direct answer to which is a better investment option between NPS and SIP. Both investment options are great. You can choose to invest in any scheme based on your investment goals and risk appetite. If your goal is to primarily build a retirement corpus, NPS is a better pick. If your goal is to simply meet various short and long-term goals, then investing in Mutual Fund SIP will be a more viable option as it offers more investment flexibility.

What is the investment duration for NPS and SIP investments?

Typically, you stay invested in NPS until your retirement. With Mutual Fund SIP investments there is no set investment duration. You can invest and redeem your investment at any given time. However, note that if you have invested in a Mutual Fund scheme like Equity Linked Savings Scheme (ELSS), you can only redeem your investment after the completion of its mandatory lock-in period.

What is the equity exposure of NPS and SIP investments?

Generally, the equity exposure of NPS investments is 75%. You can adjust the equity exposure as per your risk appetite. By default, your NPS investment’s equity exposure reduces by 2.5% every year as you reach the age of 50 years. With Mutual Fund SIP investments, you have a free hand in deciding your equity exposure. It also depends upon the mutual fund scheme.


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