NPS Vs SIP

NPS Vs SIP

The primary difference between NPS (National Pension System) and SIP (Systematic Investment Plan) is that NPS is a retirement-focused, long-term investment option regulated by the government, while SIP is a method to invest in mutual funds and can be tailored for various financial goals.

Contents:

What Is The Full Form Of SIP?

The full form of SIP is Systematic Investment Plan. It is an investment strategy where an individual invests a fixed amount regularly in a mutual fund scheme. SIP allows investors to benefit from the power of compounding, and market timing is not a concern, making it suitable for all investors.

Consider Mr. Sharma’s SIP Investment

Mr. Sharma, a 30-year-old IT professional, decides to invest ₹5,000 per month in an equity mutual fund through an SIP. The mutual fund has historically provided an average annual return of 12%.

Investment Details:

Monthly Investment: ₹5,000

Investment Tenure: 20 years (or 240 months)

Expected Annual Return: 12%

Calculation:

The future value of Mr. Sharma’s SIP can be calculated using the formula for Future Value of a Series of Cash Flows, also known as the future value of an annuity:

FV = P x ((1 + r)^n – 1) / r

  • FV is the future value of the investment
  • P = ₹5000 (monthly investment)
  • r = 0.01 (monthly rate of return, 12% annual return divided by 12 months)
  • n = 240 (20 years multiplied by 12 months)

Using the formula, Mr. Sharma’s investment would grow to approximately ₹50 lakhs after 20 years, thanks to the power of compounding and disciplined investing.

What is NPS?

The National Pension System (NPS) is a voluntary, long-term retirement scheme that enables systematic savings. It is governed by the Pension Fund Regulatory and Development Authority (PFRDA), which provides various investment options, including stocks, fixed deposits, corporate bonds, liquid funds, and government funds.

Suppose Mrs. Gupta, aged 30, decides to invest ₹5000 per month in NPS with a 50% allocation in equity and 50% in debt. Assuming an average annual return of 8%, we can use the same formula to calculate the future value of her investment by the time she reaches 60:

FV = P x ((1 + r)^n – 1) / r

Here:

  • FV is the future value of the investment
  • P = ₹5000 (monthly investment)
  • r = 0.00667 (monthly rate of return, 8% annual return divided by 12 months)
  • n = 360 (30 years multiplied by 12 months)

Using the formula, Mrs. Gupta is expected to accumulate a corpus of around ₹75 lakh by the time she reaches 60.

SIP Vs NPS

The main difference between SIP and NPS is that while SIP is more flexible and can be used for various financial goals, NPS is specifically aimed at retirement planning.

ParameterSIPNPS
Investment GoalFlexible, can be tailored for various financial goals like buying a car, home, or retirement.Primarily focused on retirement.
FlexibilityHigh, can stop and start anytime.Low, as it is a long-term commitment till retirement.
Tax BenefitsAvailable under Section 80C up to ₹1.5 lakhs.Additional tax benefit under Section 80CCD(1B) up to ₹50,000.
RiskDepends on the mutual fund chosen.Lower risk due to regulated investment options.
ReturnsVaries widely depending on the mutual fund.Generally offers stable returns.
WithdrawalIt can be withdrawn anytime but may have an exit load.Partial withdrawal allowed after 3 years, but major portion must be annuitized at retirement.
Regulatory BodySEBI (Securities and Exchange Board of India).PFRDA (Pension Fund Regulatory and Development Authority).

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NPS Vs SIP – Quick Summary

  • NPS is a government-regulated retirement savings scheme, while SIP is a flexible investment method in mutual funds.
  • SIP allows for a more flexible investment strategy tailored to various financial goals, whereas NPS is strictly for retirement.
  • SIP and NPS differ in terms of investment goals, flexibility, tax benefits, risk, returns, withdrawal rules, and regulatory bodies.
  • Start your SIP at no cost with Alice Blue. We provide a Margin Trade Funding facility, where you can use 4x margin to buy stocks i.e., you can buy stocks worth ₹ 10000 at just ₹ 2500. 

SIP Vs NPS  – FAQs  

1. What is the difference between NPS and SIP?

The primary difference between NPS and SIP is that NPS is a retirement-focused investment vehicle regulated by the government, while SIP is an investment method used in mutual funds for building wealth over time.

2. Which is better NPS or SIP?

Determining which is better between NPS and SIP depends on your financial goals, risk tolerance, and investment horizon. NPS offers tax benefits and is generally lower risk, but it is less liquid and primarily aimed at retirement savings. SIPs in mutual funds offer more flexibility and the potential for higher returns but come with higher volatility.

3. Is NPS a Good Investment?

NPS is generally considered a good investment for those looking for a long-term, tax-efficient, and relatively low-risk retirement savings option. It offers the flexibility to choose between different asset classes like equity, corporate bonds, and government securities.

4. Is NPS better than mutual funds?

NPS and mutual funds serve different financial goals. NPS is more tax-efficient and geared towards retirement with a mix of equity and debt, while mutual funds offer higher liquidity and potentially higher returns but may be subject to capital gains tax.

5. Is SIP allowed in NPS?

Yes, SIP is allowed in NPS. You can contribute to your NPS account through a Systematic Investment Plan (SIP), which allows you to invest a fixed amount at regular intervals, similar to SIP in mutual funds.

6. Is NPS safer than a mutual fund?

NPS is generally considered safer than mutual funds due to its diversified investment options and regulatory oversight by the Pension Fund Regulatory and Development Authority (PFRDA). However, the returns may be more conservative than some high-risk mutual funds.

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