Which Investment Plan is Better NPS or SIP?

Which Investment Plan is Better NPS or SIP?

Planning for retirement is an essential part of everyone's life. This involves the careful accumulation of funds that will give you the financial resources you need to pay for your post-retirement expenses. Planning for retirement is important. Make sure you start planning early.

There are two main routes to retirement that people choose: the National Pension Scheme or mutual fund SIP. This blog will allow you to compare the plans with different parameters, so you can choose which one is best for you. Continue reading!

National Pension Scheme

In 2004, the government introduced NPS or National Pension Scheme. Initially, it was an exclusive scheme available only to government employees.

NPS in India became available to all employees in India in 2009. You can invest in the scheme during your employment. When you retire, you can withdraw up to 40% from the accumulated corpus.

The remaining 60% must be reinvested in an annuity, while the rest can be credited monthly.

NPS Features

  1. Investment flexibility One of the many benefits of the National Pension Scheme's National Pension Scheme is that you can choose when you want to invest, according to your schedule. The scheme does not require that investors invest on a regular basis.
  2. Low-risk: NPS investments have low equity exposure. The maximum percentage that can be invested in equity shares or stocks is 50 percent. It will therefore be less susceptible to market fluctuations. This factor, however, limits the scheme's profit-yielding potential and only appreciates capital.
  3. NPS India has two investment options. You can choose from a wide range of securities with the first option. You can choose based on your wealth appreciation or risk appetite. The scheme manager will choose securities for you based on the investor's age. In this case, your age would have an inverse relationship with the risk factor in your portfolio.
  4. Returns NPS India is not exposed to stocks or equity shares, so their earning potential is limited. NPS funds typically return between 8% and 10% annually. It offers higher yields than other fixed-income securities. Groww's online NPS calculator can help you calculate your NPS returns.
  5. Equity portion As stated earlier, only half of NPS investments can go towards equity funds. The age of 50 will see this proportion drop by 2.5% per year.
  6. Early withdrawal: Withdrawal restrictions apply before the scheme matures or you retire. The purpose of your withdrawal will determine how much you can withdraw. For example, expenses related to medical treatment, family members or child education, building or buying a house or paying for medical bills. These withdrawals are limited to three times per scheme tenure, with a minimum gap between each one.

Systematic Investment Plan (SIP)

SIP or Systematic Investment Plan, on the other hand, is a way to invest in mutual funds that allows you to invest periodically in a specific fund and enjoy dividends on your investments regularly.

Mutual Funds are investment groups that pool funds from different individuals to buy securities. These securities may be market-linked securities or fixed-income securities. Market-linked securities include equity shares and stock; fixed income securities include debentures bonds bills, debentures, and bonds.

The NPS is generally higher than the SIP returns and long-term benefits from the former are greater. You can build a large portfolio by investing in equity portfolios via the SIP route early. This is due to the potential for compounding. The SIP route eliminates the need to time markets. Fixed income funds are another option. Fixed income funds offer higher returns than equity funds and are less risky than debt funds.

Features of Systematic Investment Plan (SIP)

  1. You must make periodic investments In the case of SIP you will need to put a set amount of money each month in your fund. This helps you to be more disciplined as an investor, and it makes your spending pattern more consistent. Start your investments as low as Rs. 500. It does not place a lot of financial burden on you, and it helps you to build your post-retirement wealth easily.
  2. Compounding SIP interest is compounded every quarter. Your corpus will increase exponentially with the compounding component.

Example: Mr. Amrit decides to invest Rs.500 monthly via SIP in a 14% ELSS Fund at 40. He intends to retire at 60 years of age. He, therefore, has 20 years to invest. His total investment amount at the end of 20 years would be Rs. 1.2 Lakh and his returns would be almost Rs. 6.5 Lakh. His investments increased by nearly six times in 20 years.

  1. Rupee Cost Averaging: In SIPP, you can enjoy the rupee cost average. This allows you to buy more units of the fund you're investing in during market slumps and then sell them when the market is high. This feature significantly lowers the cost of funds and gives you a greater profit margin.
  2. Higher returns If you compare NPS to SIP Mutual Funds the latter offer significantly higher returns. NPS is limited in its exposure to stocks and equity shares, while Mutual Funds allow for greater investment options. The long-term track record of equity funds is that they provide returns between 14% and 18%. It responds to market volatility at a more or less comparable intensity, so it is subject to higher risk.
  3. Many options: Mutual Funds provide a variety of investment options. You can choose to invest in equity funds or ELSS, debt funds, and hybrid funds depending on your risk tolerance and time horizon. Equity funds and ELSS can be used to buy stocks and equity shares; debt funds can be used to purchase fixed-income instruments; hybrid funds can be used to purchase a mixture of equity and fixed-income instruments, and fund of funds is used to invest in other Mutual Funds. If you want to diversify your portfolio and gain substantial wealth for retirement, hybrid funds are the best choice.
  4. Simple investment process: SIP's investment process is simple. Link your bank account to which you wish to invest with your aggregator. You also have the option to agree to automatic payments. Your account would automatically debit the investments at the due date.
  5. Withdrawal: Mutual funds investments, other than ELSS funds, can be withdrawn at any time during the investment tenor. After you have accumulated sufficient retirement funds, you can start a system to withdraw your investments. This will provide monthly income.

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