One should always take a financial planner’s help while constructing a retirement portfolio
Planning for retirement often involves balancing flexibility and discipline. Two common choices in India are mutual funds and the National Pension System (NPS). Each caters to different types of investors, and knowing their strengths and limitations can help you choose wisely.
NPS
NPS is designed specifically for retirement. It encourages disciplined savings through regular contributions and comes with tax benefits at multiple stages. The scheme offers a mix of equity and debt exposure, gradually becoming more conservative as you approach retirement.
NPS generally makes a compelling case as the foundational retirement vehicle for three reasons.
First, tax efficiency: It offers an additional Rs 50,000 deduction outside the Rs 1.5 lakh Section 80C limit, and this benefit is available under both the old and new tax regimes.
Second, cost: NPS fund management charges are among the lowest in the industry, which compound meaningfully over a 20–30-year retirement horizon.
Third, discipline: “The lock-in structure, while often cited as a drawback, is actually a feature for retirement planning,” said Nitin Agrawal, CEO – Mutual Funds, InCred Money. “It removes the temptation to redeem during market corrections, providing a behavioural guardrail that most investors underestimate the value of.”
Moreover, recent reforms have also made NPS more flexible; subscribers can now withdraw up to 80 percent of their corpus as a lump sum at retirement, with only 20 percent mandatorily directed toward an annuity, addressing one of the most common objections to the product. That is a significant improvement in the liquidity profile at maturity.
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Cons
Money gets locked for a long time: NPS is meant strictly for retirement. You cannot freely withdraw your money before age 60. Partial withdrawals are allowed, but only under certain conditions.
Limited control over investments: Even though you can choose asset allocation, fund management options are limited compared to mutual funds. You cannot pick individual stocks or customise deeply.
No guaranteed returns: Except for some government bond portions, NPS returns are market-linked. This means your final corpus depends on market performance.
Mutual funds
On the mutual fund side, the case is equally strong but for different reasons. You can invest in equity, debt, or hybrid funds depending on your risk appetite. There is no strict lock-in period in most mutual funds, which means you can withdraw your money when needed.
Mutual funds offer unrestricted flexibility, superior liquidity, and, particularly in the equity category, a higher long-term return potential. For investors planning to retire before 60, mutual funds are especially critical since they can access their corpus before NPS withdrawals begin. The ability to run a Systematic Withdrawal Plan post-retirement also gives mutual funds an edge in managing cash flows through retirement years, without being locked into annuity rates that may not keep pace with inflation.
“The ideal retirement framework, in our view, uses both in a complementary manner. NPS serves as the disciplined, tax-efficient, low-cost foundation, part of the portfolio that will unconditionally be there at retirement. Mutual fund SIPs serve as the growth and liquidity engine, building the corpus that offers flexibility, higher return potential, and access to funds for goals that arrive before the age of 60,” said Agrawal. For younger investors, a higher allocation to equity mutual funds with a base NPS contribution makes sense.
Cons
No fixed pension income: Unlike the NPS, mutual funds do not automatically give you a monthly pension. You have to manage withdrawals yourself, which can be risky if not planned properly.
Requires discipline and active management: You need to invest regularly, review your portfolio, and adjust your asset allocation over time. Without proper planning, you may either take too much risk or withdraw money too quickly.
No guaranteed returns: Mutual funds are market-linked. This means returns can go up or down depending on the stock market. If the market falls near your retirement time, your savings may be reduced.
Experts say treating NPS and mutual funds as alternative solutions is the fundamental mistake most investors make. Retirement is not a single-product decision; it is a portfolio construction exercise, and both instruments have a defined and valuable role to play in it.
One should always take a financial planner’s help while constructing a retirement portfolio.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.