When it comes to investing for retirement, the National Pension System (NPS) and Equity-Linked Savings Scheme (ELSS) mutual funds are two popular options that investors can consider. While both schemes offer tax benefits and the potential for long-term growth, they have some differences in terms of investment objectives, risk profile, and features.

NPS vs ELSS Mutual Fund: Which is Better?

1. Investment Objectives:

The NPS is primarily designed to provide a retirement corpus to investors. It is a long-term investment that allows investors to contribute regularly towards their retirement savings. The scheme offers a range of investment options, including equity, corporate bonds, and government securities.

On the other hand, ELSS mutual funds invest primarily in equity markets with a goal of generating capital appreciation in the long term. ELSS mutual funds have a lock-in period of three years and offer tax benefits under Section 80C of the Income Tax Act.

2. Risk Profile:

The risk profile of NPS and ELSS mutual funds is different. While NPS offers various investment options with different risk profiles, the scheme as a whole is considered to be less risky than ELSS mutual funds. This is because NPS has a diversified portfolio that includes equity, debt, and government securities, while ELSS mutual funds invest mainly in equities, which are more volatile.

3. Returns:

NPS and ELSS mutual funds have the potential to generate high returns over the long term. However, ELSS mutual funds have a higher potential for returns than NPS because they primarily invest in equities, which have historically generated higher returns than debt and government securities. It’s important to note that the returns on both schemes are market-linked and subject to market risks.

4. Tax Benefits:

Both NPS and ELSS mutual funds offer tax benefits to investors. Contributions made towards NPS are eligible for tax deductions under Section 80C of the Income Tax Act, up to a limit of Rs. 1.5 lakhs. Additionally, subscribers can also claim an additional tax deduction of up to Rs. 50,000 under Section 80CCD(1B).

Similarly, ELSS mutual funds offer tax benefits under Section 80C of the Income Tax Act, up to a limit of Rs. 1.5 lakhs.

In conclusion, both NPS and ELSS mutual funds are viable options for long-term retirement savings. The choice between the two will depend on the investor’s investment objectives, risk profile, and investment horizon. If the primary objective is to build a retirement corpus, then NPS may be a better option. On the other hand, if the investor is looking for potentially higher returns and is comfortable with market volatility, then ELSS mutual funds may be a better option. It’s important to consult with a financial advisor before making any investment decisions.