NPS vs SIP: Rs 12,000 monthly investment for 20 years — Which creates a bigger corpus?

The National Pension Scheme (NPS) and Systematic Investment Plan (SIP) are considered good ways of investing, but fulfill different financial goals. NPS is a government-backed scheme to build a retirement fund, while SIP is a mutual fund investment in which you can invest an amount regularly to build corpus for long-term goals. In this article, we will know which investment option can give you better returns on Rs 12,000 monthly investment for 20 years. Before that, let's know more about NPS and SIP.

What is NPS?

It is a government-backed scheme started to provide retirement income to all Indian citizens. The scheme is managed by the Pension Fund Regulatory and Development Authority (PFRDA). In NPS, you can invest in a pension account throughout your employment.

Types of NPS accounts

Pension account (Tier-I): There are some restrictions on withdrawal.
Voluntary savings account (Tier-II): Under this, you can withdraw money easily.

How does NPS investment work?

In NPS, when you are 60, you are allowed to withdraw part of your investment and the remaining amount can be used to buy an annuity for regular pension. It is available to all citizens and allows you to allocate how much of your money to equities (stocks) based on your risk tolerance and age. This flexibility might have an influence on your long-term results.

What is SIP?

SIP is a way to invest in mutual funds. This is a market-linked scheme. However, you get benefits like rupee cost averaging, compound interest, and freedom to choose investment amounts and types of funds.

SIP vs NPS

SIP offers flexibility and you can invest for both short- and long-term goals and withdraw your money at any time (subject to the scheme's terms). On the other hand, NPS is primarily a retirement-focused investment, with the corpus generally locked in until the age of 60. However, the partial withdrawal is possible under specified conditions. You can also make an early exit.

Tax benefits

In NPS, you can build a tax-free retirement fund, while you have to pay tax on returns in SIP mutual fund investments.

SIP: How much corpus can you build if you invest Rs 12,000 monthly for 20 years?

If you invest Rs 12,000 per month in mutual funds through SIPs, you can build a corpus of Rs 1,19,89,775 (Rs 1.19 crore) in 20 years.

Understand calculations
Total investment: Rs 28,80,000
Period: 20 years
Expected returns: 12%
Total Returns: Rs 1,19,89,775

NPS: How much corpus you can build if invest Rs 12,000 monthly for 20 years?

Monthly Contribution: Rs 12,000
Investment duration: 20 years
Annualised return: 11.96 per cent
Annuity rate of return: 7%

(Here, the NPS calculations are done for the non-government sector opting for NPS Active Choice (investments 75 per cent in equity and 25 per cent in government bonds). The monthly investment amount is Rs 12,000 for 20 years. Here, annualised return is 11.96 per cent (as per NPS Trust calculator) and the annuity rate is 7 per cent.)

Conclusion

Choosing NPS or SIP for investments depends on investors' needs. It depends on various factors like duration, risk appetite, and government scheme, among others.