Week 47: NPS vs Index funds

June 19, 2023

After understanding the What and Why of NPS, I wanted to compare it with Index funds in terms of Investment style, Equity exposure, and Benefits.

NPS vs Index funds

Parameters	NPS	Index funds
Portability	You can switch your pension fund manager without exiting the funds.	You've to exit-reinvest your funds to change your fund manager.
Withdrawals	Age < 60: Full withdrawal if the corpus is < ₹ 2,50,000 and completed 5 years since inception. Age < 60: Partial withdrawal for Higher education or Marriage of children, purchase of land, treatment of critical illness ^[1]. Age > 60: 60% of the corpus; rest will be used to purchase an annuity.	You can withdraw as and when required.
Diversification in equity	Top 200 stocks ^[2]	50 stocks, if tracking Nifty. 30 stocks, if tracking SENSEX.
Investment style	Though regulated, stock picking within the range of top 200 market cap stock is technically active.	Passively mirroring the index
Tax benefits	₹ 1,50,000(80 CCE) + ₹ 50,000 80 CCD(1B) = ₹ 2,00,000.	NA
Maximum equity allocation	`75%` ^[3]	`95%` ^[4]
Historical returns (Mini. 5yrs)	`12.54%`	`14.61%`
Expense ratio	`0.09%` ^[5]	`0.06%`

References

[1] https://npscra.nsdl.co.in/all-faq-withdrawal.php
[2] PFRDA/2021/28/REG-PF/2: Investment Guidelines - 2021 for NPS Schemes (Applicable to Scheme CG, Scheme SG, Corporate CG and NPS Lite scheme of NPS and Atal Pension Yojana) w.e.f 20th July, 2021
[3] Circular on allowing option to allocate 75% of subscriber’s contribution in Asset Class E (Equity) in Tier-I and 100% in Asset Class E (Equity) in Tier-II under active choice without any conditions of tapering from the age of 51 years (2.83 MB) - 20/10/2022
[4] https://www.amfiindia.com/investor-corner/knowledge-center/SEBI-categorization-of-mutual-fund-schemes.html
[5] https://npstrust.org.in/content/charges-under-nps

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