Mutual Funds Or NPS Tier-2: Which is Better?

Vaishali reached out to us with this burning question

Vaishali, a mother of a two-year-old boy, works with a Pune-based IT firm and earns a lakh monthly. The 35-year-old is putting ₹5,000 each month in NPS (National Pension Scheme) Tier-1 with the help of her employer for the last five years.

While saving for retirement from a young age is highly commendable, she realises she must also invest for her son’s higher education. She was looking at a few mutual funds when one of her colleagues nudged her to explore the NPS Tier-2 route, so she contacted us for help.

What is NPS Tier-2

NPS Tier-2 is an affordable, voluntary investment account. Affordable because the management fees of these funds don’t exceed 0.09 per cent. Voluntary because you have the flexibility to invest in equity or debt or both. In addition, going by past data, they have provided double-digit returns. Having said that, do bear in mind that the Tier-2 option is only available to Tier-1 subscribers.

Differences between Tiers 1 and 2

While both fall under NPS, Tier-1 investment is suited for retirement planning and tax-saving purposes. With Tier-1, you can’t withdraw your money before 60, barring a few exceptions. And even when you reach that age, you receive only 60 per cent of your total corpus. The rest is moved to annuities.

Tier-2, meanwhile, allows investment withdrawals at your convenience. Just like mutual funds, you can invest through SIP. But unlike actively-managed mutual funds, they charge less management fees. Sure, Tier-2 has additional transaction and withdrawal costs, but the lower management fees can be a significant difference-maker.