NPS was launched by the Central Government to help individuals have an income in the form of a pension to look after themselves during retirement. A SIP is a way to invest a fixed amount of money regularly (daily, weekly, monthly, or yearly) into mutual funds. Investors often get confused between SIP and NPS, which is a better option to go for a retirement plan. Let us compare both schemes to find out which will help the investor generate a higher corpus on a Rs 12,000/month investment for 25 years.
What is National Pension Scheme?
NPS is a market-linked defined contribution scheme that helps you save for your retirement. It is a government-backed, voluntary retirement plan regulated by the PFRDA (Pension Fund Regulatory and Development Authority). Under this scheme, the investor has to allocate a certain amount from their monthly income towards the NPS account during their employment period. At the age of retirement, the investor is eligible to withdraw up to 40 per cent of the accumulated corpus, and the rest 60 per cent needs to be reinvested in the annuity.
What is a Systematic Investment Plan (SIP)?
A SIP is a way to invest a fixed amount of money regularly (daily, weekly, monthly, or yearly) into mutual funds. It’s a flexible option to save for goals like education, retirement, or future needs.
What investment options are available in NPS?
NPS offers two investment options: Active Choice and Auto Choice, allowing you to choose how your retirement savings are invested.
Active choice investment in NPS
In the active choice investment, investors decide to invest in their choice of securities according to their risk appetite and age.
Auto choice investment in NPS
In auto choice investment, the scheme manager chooses the securities to invest on your behalf based on the age slab of the investor.
NPS calculation conditions
- Monthly Contribution: Rs 12,000
- Investment duration: 25 years
- Annual increase in contribution: 5 per cent
- Annuity rate of return: 6.75
NPS Calculation
We are calculating the NPS corpus for the non-government sector with:
Investment mix: 75% equity, 25% government bonds
Check the calculation below.
NPS: What will be your retirement corpus with Rs 12,000 monthly investment?
Total investment during that period will be Rs 68,34,001. The estimated capital gains will be Rs 2,26,61,230, and the estimated retirement corpus will be Rs 2,94,95,231.
NPS: What will be your lump sum withdrawal amount?
At the age of 60, you can withdraw an estimated of Rs 1,76,97,139.
NPS: What will be your monthly pension?
Your estimated monthly pension will be Rs 66,364.
SIP calculation conditions
- Monthly Contribution: Rs 12,000
- Investment duration: 25 years
- Annualised return: 12 per cent
Since there are no fixed returns in SIP investment, we are calculating as per annualised returns of 8 per cent (debt fund), 10 per cent (equity fund), and 12 per cent (hybrid fund).
SIP: What will be your retirement corpus with Rs 12,000 monthly SIP in equity fund?
At a 12 per cent annualised return, the estimated corpus in 25 years will be Rs 2,04,26,479, where Rs 36,00,000 will be your investment amount, and your estimated capital gains will be Rs 1,68,26,479.
SIP: What will be your retirement corpus with Rs 12,000 monthly SIP in hybrid fund?
At a 10 per cent annualised return, the estimated corpus in 25 years will be Rs 1,49,17,915, and the estimated capital gains will be Rs 1,13,17,915.
SIP: What will be your retirement corpus with Rs 12,000 monthly SIP in debt fund?
At an 8 per cent annualised return, the estimated corpus in 25 years will be Rs 1,09,78,073, and the estimated capital gains will be Rs 73,78,073.
DISCLAIMER: Not financial advice; invest at your own risk
