Retirement planning is crucial for financial stability in old age. Among the various investment options, the National Pension System (NPS) and Equity Savings Funds are two popular choices. Both offer regular income after retirement but come with different structures, benefits, and risks. While NPS is a government-backed pension scheme, Equity Savings Funds provide market-linked returns with withdrawal flexibility. Choosing the right option depends on factors like cost, taxation, flexibility, and expected returns. Let’s compare both investment options in detail to help you make an informed decision.
NPS: Secure and Low-Cost Retirement Plan
The National Pension System (NPS) is designed to provide long-term financial security. It invests in both equity and debt instruments, balancing risk and returns. The key features of NPS include:
1. Investment Structure:
- The equity portion varies with the investor’s age (up to 75%).
- The rest is invested in AAA-rated corporate bonds and government securities (G-Secs).
- Large-cap stocks dominate the equity component, ensuring stability.
2. Tax-Free Withdrawals:
- On maturity, up to 60% of the total corpus can be withdrawn tax-free.
- The remaining 40% must be used to buy an annuity, providing a lifelong pension.
- Contributions are eligible for tax deductions under Section 80CCD(1B) of the Income Tax Act.
3. Low Management Costs:
- NPS has one of the lowest expense ratios, not exceeding 0.09%.
- This ensures that most of your investment grows without high deductions.
NPS is a disciplined way to save for retirement with tax advantages, making it a preferred option for long-term investors.
Equity Savings Funds: More Flexibility with Market-Linked Growth
Equity Savings Funds are hybrid mutual funds that invest in equity, debt, and arbitrage opportunities. These funds are ideal for investors who prefer flexibility in withdrawals while earning balanced returns.
1. Investment Structure:
- 15-40% in equity, ensuring growth.
- 25-50% in arbitrage, minimizing risk.
- Remaining in debt instruments, providing stability.
2. Systematic Withdrawal Plan (SWP):
- Investors can withdraw money as needed, unlike NPS where withdrawals are limited.
- This makes Equity Savings Funds more liquid and adaptable to financial needs.
3. Taxation and Expenses:
- Long-term capital gains (LTCG) tax applies after one year.
- Gains up to Rs.1.25 lakh are tax-free.
- Above this limit, a 12.5% tax is applicable.
- Short-term capital gains tax is 20% if withdrawn within a year.
- Expense ratios are higher than NPS, averaging 0.64%.
Equity Savings Funds suit investors who want regular income with greater flexibility, despite slightly higher costs and taxes.
Which Option Gave Better Returns in the Last 10 Years?
A comparison of past performance shows that NPS has delivered better returns than Equity Savings Funds over a decade. Let’s analyze the impact on a Rs.1 crore investment with Rs.50,000 monthly withdrawals:
| Investment Option | Corpus Left After 10 Years | Withdrawals Per Month |
| NPS | Rs.1.94 crore | Rs.50,000 |
| Equity Savings Fund | Rs.1.50 crore | Rs.50,000 |
This data shows that NPS provides higher wealth accumulation and tax-free withdrawals, making it more efficient for retirement planning.
Risk and Stability: Which is Safer?
Both NPS and Equity Savings Funds are relatively low-risk compared to direct stock investments. However, NPS is considered more stable due to its structured investment approach.
- The standard deviation (a measure of risk) of NPS is 5.35%, slightly lower than Equity Savings Funds (5.4%).
- Since NPS invests in a mix of equities and government-backed bonds, it is less volatile.
- Equity Savings Funds, being market-linked, may fluctuate more in the short term.
Which One Should You Choose?
Your choice depends on your retirement goals and financial preferences:
NPS is better if:
- You want a structured, low-cost, and tax-efficient retirement plan.
- You prefer long-term stability over short-term liquidity.
- You are comfortable with the mandatory annuity purchase.
Equity Savings Funds are better if:
- You want flexible withdrawals without restrictions.
- You are comfortable with higher tax liability and management fees.
- You are willing to take slightly more risk for potentially higher returns.
Both investment options offer different advantages, and the right choice depends on your risk appetite, financial needs, and retirement planning strategy. A mix of both investments can also help balance security and flexibility for a well-rounded retirement portfolio.
