SIP Vs NPS: Which Investment Yields A Better Corpus On Rs 7,000 Monthly For 25 Years?
When it comes to planning for long-term financial goals, two popular options often emerge: the National Pension Scheme (NPS) and the Systematic Investment Plan (SIP) in mutual funds. Both investment avenues cater to different risk profiles and offer distinct benefits, making it crucial to understand their core differences before deciding which aligns with your financial goals. Here’s a detailed comparison of SIP and NPS to help you make an informed decision.
Understanding SIP and NPS
Before diving into the differences, it’s important to understand what each investment vehicle represents. A SIP is a method of investing a fixed amount regularly in mutual funds. This disciplined strategy leverages rupee cost averaging and the power of compounding to build wealth over time. On the other hand, NPS is a government-backed pension scheme that facilitates systematic savings for retirement, providing a steady income stream post-retirement.Investment Options and Risk Exposure
SIP Investment Choices
SIP investments offer significant flexibility, allowing investors to choose between equity funds, debt funds, hybrid funds, and more. Depending on risk appetite and financial goals, one can select funds that align with their long-term planning. Equity funds typically offer higher returns but carry greater risk, while debt and hybrid funds provide stability with moderate returns.NPS Investment Choices
NPS, in contrast, provides two main investment options—Active Choice and Auto Choice. In Active Choice, investors decide the allocation among equity, corporate bonds, and government securities based on their risk tolerance. Auto Choice, however, automatically manages the allocation based on the investor’s age. NPS permits a maximum of 75% exposure to equities, ensuring balanced growth with controlled risk.Expected Returns and Growth Potential
SIP Returns
SIP investments in equity funds generally provide an annualised return of around 12%, depending on market conditions. This consistent growth potential makes SIP a strong option for long-term wealth creation . For instance, a monthly SIP of Rs 7,000 over 25 years, assuming a 12% annual return, is projected to generate a corpus exceeding Rs 1 crore, highlighting its power for aggressive investors.NPS Returns
NPS investments, with a maximum equity exposure of 75%, typically yield annual returns between 9% and 10%. A Rs 7,000 monthly contribution for 25 years is estimated to create a sizeable retirement corpus, albeit slightly lower than SIPs. However, NPS’s unique benefit lies in its pension facility, offering a regular income stream after retirement.Liquidity and Withdrawal Flexibility
SIP Flexibility
One of SIP’s primary advantages is its liquidity. Investors can withdraw funds partially or fully without heavy penalties, providing access to cash during emergencies. This flexibility is ideal for those who want growth alongside financial accessibility.NPS Withdrawal Rules
NPS is more rigid, given its pension-oriented structure. Partial withdrawals are allowed only under specific conditions like education, property purchase, or medical emergencies. Upon maturity, 60% of the corpus can be withdrawn as a lump sum, while the remaining 40% is mandatorily used to purchase an annuity for a regular pension.Tax Benefits and Final Thoughts
Both SIP and NPS qualify for tax deductions under Section 80C. Notably, NPS also allows for an additional Rs 50,000 deduction under Section 80CCD(1B), providing a slight edge in tax savings. Ultimately, the decision between SIP and NPS depends on your risk appetite, liquidity requirements, and long-term financial goals.Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult with a financial expert before making any investment decisions. According to experts, assessing your financial goals and risk tolerance is key before choosing between SIP and NPS.