Systematic Investment Plan or SIP is an investment method that provides one with the opportunity to invest in mutual funds. Under this, investors are required to invest fixed amounts periodically. The frequency of the investment and the quantum of payment are both decided at the time of starting the SIP. It is usually weekly, bi-weekly, monthly, quarterly, semi-annually, or annually, and one can start with an amount as low as Rs500. The amount is debited from your bank account and used to buy units of the mutual fund of your choice.

On the other hand, the central government introduced the National Pension Scheme (NPS) as a social security initiative for employees under public, private, and unorganised sectors. Under this scheme, a certain amount of money from your income is regularly invested towards a pension account during your period of employment. You are eligible to withdraw a certain percentage of your corpus on maturity or retirement while the remaining portion is credited to your account as a monthly pension.

Let us look at both investment vehicles to understand their similarities and differences.

By adopting the SIP method of investing, individuals can regularly invest without worrying about market dynamics. In the long run, it can work in their favour, thanks to the power of compounding and rupee cost averaging. Investing in SIPs has many benefits. These are:

1. Instils discipline: Financial discipline is mandatory for long-term capital appreciation. Investing via SIPs automates your payments towards pre-determined mutual funds
2. An emergency fund for rainy days: Investing via SIP acts as a safety net in times of financial crisis such as unemployment or critical illness
3. Rupee cost averaging: Since more units are purchased when the market is low and vice-versa, rupee cost averaging helps bring down the cost per unit of a mutual fund
4. Power of compounding: With compounding, the returns you generate on your investments are reinvested. Thus, could you generate returns on returns. This results in an increase in your principal amount each year.

Here are some benefits of the NPS scheme:

1. Voluntary contribution: An NPS subscriber can increase or decrease the amount they wish to invest in the scheme annually
2. Flexibility: NPS investors are offered a wide array of investment options that helps build their pension funds
3. Transparency: The NPS trust ensures that the investments are in line with the regulatory norms of PFRDA (Pension Fund Regulatory and Development Authority).

You select the time horizon while investing in a mutual fund via SIP and can request to withdraw your invested amount (either the entire amount or a part of it) at any time subject to lock in period of schemes. On the other hand, for NPS, you can withdraw a part of your corpus only after you’ve attained 60 years of age or at the time of your retirement.

SIP investments in equity-linked savings schemes (ELSS) and NPS are both eligible for tax deductions under Section 80C of the Income Tax Act, 1961.

SIP in ELSS: You can claim tax benefits of up to Rs1.5 lakh on investments in ELSS funds in a particular financial year. The caveat here is that ELSS funds come with a lock-in period of 3 years and you cannot liquidate the asset before this is over.

NPS: An NPS subscriber is eligible for tax benefits up to Rs1.5 lakh under Section 80C of the Income Tax Act, 1961. You can also avail additional tax benefits of up to Rs50,000 under sub-Section 80CCD (1B) of the Income Tax Act.

Conclusion

It is always advised to consider your financial goals before choosing a particular investment vehicle. Choosing between SIP and NPS requires a lot of planning. Invest in mutual funds via SIP if you have specific goals that you would want to achieve within a specific timeframe. NPS, on the other hand, could be the best bet for individuals planning a stress-free retirement plan.

The comparison of NPS vs SIP is for illustrative and underdstanding purposes only and should not be construed as an investment advice in any manner. Investments in mutual funds relatively carry higher risks. The content herein does not take into account individual investor’s objectives, risk appetite or financial needs or circumstances or the suitability of the mutual fund products described herein. Hence, investors are advised to consult their professional investment adviser/ consultant/ tax advisor for investment advice in this regard.

STANDARD DISCLAIMER

The information given here is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme