Mutual Funds Beginner

NPS vs. SIP: Which is a better investment plan?


There will always be varying views as to which investment is best. Most investors would feel at home with plans where they only need to make periodic small investments. Since the National Pension Scheme (NPS) and Systematic Investment Plans (SIPs) for mutual funds let you make such periodic payments, the question is: Which is better?

What is NPS?

NPS is a scheme started by the Government of India to help investors with a budget.

There are two types of NPS accounts: Tier I and Tier II. With Tier I accounts, the scheme’s subscribers pay a specified amount each month for the duration of their work tenure. On retirement, they can withdraw a certain amount of the corpus (usually 60%). The rest (40%) is converted into an annuity payment as a retirement pension. Tier II accounts function like voluntary savings bank accounts. There is no minimum balance requirement, and withdrawals are permitted without an exit load. Separate nomination facilities are also allowed. Holders can transform their accounts into Tier I pension accounts at any time.

The government collects the money and invests it in assorted financial securities.

What is SIP?

With a mutual fund SIP, the investor agrees to pay a specific sum at specific intervals to the fund. The contribution is converted into shares/units at applicable rates, creating a corpus.

The manager of the mutual fund invests the money in the money market. And the investors receive returns by way of interest or dividends. The mutual fund scheme deducts a certain amount as administrative expenses. The rest of the fund distributes as dividends.

The investor can reinvest the dividend into the fund and receive more units/shares if they so desire.

Features of NPS and SIP

Let us now look at the features of both these schemes individually.

NPS features

  1. The account opening process takes around twenty minutes online.
  2. Contributions start from just ₹1,000/- per annum and can be a lump sum payment or a SIP.
  3. The investor can seamlessly transfer the account when they change jobs or move to different locations.
  4. There are nominal annual fees on investments amounting to less than 0.09% p.a.
  5. Though there is no fixed or minimum return stipulated, historically, NPS schemes have been known to deliver better returns than many other investment options.
  6. It is well-regulated by government authorities.

SIP features

  1. Seasoned fund managers invest the contributions of individual investors across diverse investment instruments.
  2. SIPs instill discipline among investors, encouraging them to make regular contributions.
  3. The investor is not burdened with large payments, and the payments can be synced with monthly salaries/emolument receipts.
  4. A one-time mandate given to the bank takes care of monthly remittances so long as there is sufficient balance in the account.
  5. SIPs let investors compound their earnings from mutual funds into additional shares/units of the same scheme.
  6. Investors may skip or even stop payments if they wish to.

The difference between NPS and SIP

In an NPS scheme, the capital has to be locked in till retirement.

In a SIP, there is no lock-in period, except in some tax-saving Equity-Linked Savings Schemes (ELSS) schemes. For them, the period is usually three years.

Also, the NPS is government-run, but SIPs are not.

Tax benefits of NPS and SIP

NPS and SIP contributions receive income tax exemption under section 80C of the Income Tax Act. NPS contributors receive an additional exemption of ₹1,50,000 under Sec 80 CCE of the Income Tax Act.

With Tier I NPS accounts, investors can claim tax benefits up to ₹50,000 under section 80CCD(1B) of the Income Tax Act.
SIPs linked to tax-saving ELSS schemes allow investors to claim deductions up to ₹1,50,000 under section 80C.


NPS and SIPs have advantages and disadvantages. Since NPS matures only with the retirement of the investor, young adults will have to wait a long time. Even after the wait, they can only withdraw up to 60%, while the rest flows into an annuity scheme that gives them a monthly pension.

SIP investors, on the other hand, can collect the corpus at any time. But because of that, they do not receive a monthly pension after retirement.

So, the choice between NPS and SIP depends on whether you want relatively quick returns or a steady income after retirement. You are ultimately the best judge for yourself.


Which is better—an investment NPS or a mutual fund?

This depends on the financial needs and circumstances of individual investors. The trade-off will be between 1) a secure, steady pension income flow after retirement and 2) comparatively immediate returns that can be reinvested. Investors who want the former are likely to choose NPS, while the latter may be better off with a mutual fund.

Which investment is better than SIPs?

As with any investment opportunity, the choice of the investment instrument and the timing of the purchase play a very important role. Risks are comparatively higher with lump sum investments. However, if such investments are made when the market hits a low, the returns are better.

Can I invest in SIP in NPS?

NPS accounts permit SIP investments.

What are the disadvantages of NPS?

There are a few disadvantages of NPS, namely:
1. Fixed withdrawal limits
2. Maturity only on retirement
3. Taxation when withdrawing
4. Mandatory annuity

What factors should I consider when choosing between NPS and SIP?

Consider your financial goals, risk tolerance, and tax benefits. NPS offers retirement planning with tax benefits, while SIP provides flexible wealth creation.

Can I invest in both NPS and SIP simultaneously?

Yes, you can invest in both NPS (National Pension Scheme) and SIP (Systematic Investment Plan) simultaneously to diversify your savings and investments.

What are the tax benefits of NPS and SIP?

NPS offers deductions under Section 80C and additional benefits under Section 80CCD(1B) of the Income Tax Act. SIP provides no specific tax benefits.

What are the risks involved in NPS and SIP?

NPS has market risks, no fixed returns. SIP has market volatility risk, returns vary with market conditions. Diversify for risk mitigation.

Disclaimer: Investing in mutual funds is subject to market risks. Please read all scheme-related documents carefully before investing. Potential returns from a mutual fund product are not guaranteed. Past performance is not indicative of future results. None of our articles are intended to and should be considered investment/financial advice from CoinSwitch.

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