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Which is a better Investing Option for Investors: NPS Tier 2 or Mutual Fund?

Which is a better Investing Option for Investors: NPS Tier 2 or Mutual Fund?

Published on 22 June 2022 .Views 19 .Comments 0
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In this article, we will be discussing the National Pension System, What is it and what are its eligibility criteria. Moreover, we will discuss in detail its Tier-2 system and will compare the same with Mutual Fund. So, let’s get started.

What is NPS?

  • NPS is a defined contribution pension scheme that is a highly efficient, technology-driven system to save small amounts today and build a fund for life’s second innings.
  • Eligibility: One can join if you are any or all of the following:
  • Citizen of India; Resident or Non-Resident
  • Age between 18-60 years, as of the date of joining
  • Salaried or Self Employed
  • Complies with KYC norms

Types of NPS Account:

What is NPS Tier-2:

  • The NPS Tier II is a voluntary account that can be opened only if you have a Tier I account.
  • When opening an NPS Tier II account, you are required to make a minimum contribution of Rs 2,000.
  • The only thing to note is contributions made to a Tier II NPS account must be in multiples of Rs 250.
  • A Tier II NPS account offers greater flexibility in terms of withdrawal, and no exit load is charged when you withdraw funds from your Tier II NPS account. However, NPS Tier II investments are not tax-free.

Key Features of NPS Tier-2:

  1. No additional CRA charges for account opening and annual maintenance in respect of Tier II.
  2. Unlimited online withdrawals and get credit in your Bank Account depending upon your requirements.
  3. Separate Nomination in Tier-II account.
  4. Contribute to your Tier account online at www.enps.nsdl.com or deposit your contribution to any POP/POP-SP(Points of Presence Service Providers) of your choice.
  5. Separate Scheme Preference for Tier II.
  6. You can changes Scheme Preference twice a year and Pension Fund Managers (PFM) once a year.
  7. Two Investment options:

i) Active Choice-Individual Funds (E (Equity), C (Corporate Bonds), G (Government Securities) assets)

ii) Auto Choice –Life Cycle Funds

  1. There is no lock-in period for the Tier II accounts. There is an option for the government employees to claim tax benefits from the scheme if they have kept their investments for a minimum of 3 years

Asset Classes in National Pension System:

1. E-Equity

2. C- Corporate Bonds

3. G- Government Securities

4. A- Alternate Investment Fund (AIF)

  • No one can invest 100% in equity whether you are taking an active or auto scheme doesn’t matter you can invest only 75% in equity. In auto choice after 35 years automatically it started decreasing and in the action, after 50 years it started reducing even for Tier-2.
  • But in Corporate and government securities there is no restriction whereas in AIF only 5% is allowed.


Performance of all the assets class is realized differently by NPS.

  • There are 7 fund managers:
  1. Aditya Birla Sun Life
  2. HDFC Pension Management
  3. ICICI Pru Pension Management
  4. Kotak Mahindra Pension Fund
  5. LIC Pension Fund
  6. SBI Pension Fund
  7. UTI Retirement Solution

1) Equity returns for 1 and 3 years:

  • One-year trailing return of equity, all the fund manager has given better return concerning Nifty 50 and Large-Cap.
  • The expense ratios of all these funds are very low as compared to mutual funds, in NPS tier 2 expenses ratio is around .01% to .1%.
  • Three-year performance is almost similar, doesn’t have much difference.

2) Corporate Bond returns for 1 and 3 years:

  • In the corporate bond fund, the mutuals fund corporate bond had given a better return as compared to NPS Tier 2 corporate bond in one year but in 3 years NPS Tier 2 has a better return.

3) Government securities return for 1 and 3 years:

  • In Government securities Mutual funds have done better in one year whereas in 3-year return is almost similar.
  • Performance-wise there is not much difference between the NPS Tier 2 and Mutual funds but the difference is in expense ratio.

What should investors do?

There is a huge difference in ease of using both, mutual fund is very easy to use track, and understand as compared to NPS Tier 2. NPS Tier 2 is a kind of aggressive hybrid mutual fund, investors can choose according to their requirements and risk appetite.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.

Originally Published On: https://blog.investyadnya.in/which-is-a-better-investing-option-for-investors-nps-tier-2-or-mutual-fund%ef%bf%bc/

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