Should I be investing in NPS for retirement? Or do mutual funds work better?

What are the different things to consider when deciding between the two? Does the taxation aspect tilt the favour towards NPS?

If someone is 20 years or more from retirement and willing to take risks, how do they fit NPS in their portfolio?

Can one also manage their asset allocation through NPS? How?

Anything else one needs to keep in mind when investing in NPS?

Retirement planning is a highly ignored subject and quite misunderstood. The National Pension Scheme by the government is a great vehicle to invest for one's retirement fund. NPS offers a tax benefit of a 50,000 deduction for individuals and the accumulated corpus can be withdrawn upto 60% at the age of 60 and the rest can be taken as a monthly annuity. There is an endless debate between NPS and mutual funds, however both have their own advantages and disadvantages. While NPS has immense benefits in terms of costs and taxation to the extent of 50k it also has a limitation of liquidity where 40% of the accumulated corpus can only be taken as an annuity (which is basically as a monthly income) post retirement. Another big benefit of NPS is that one can switch between different asset classes viz. Equity to debt and vice versa in NPS without a tax impact while if a similar thing is done with Mutual Funds there would be a tax incidence. 

A fine balance of mutual funds and NPS is the best way to get about retirement planning. Individuals can check the tax benefits and surely capitalise them to the maximum and in fact can look at further investments as well into NPS at least to the extent of working backwards to determine the cash flow needs post retirement and fill in a fair portion of that through the NPS. Anything more than this can be invested into mutual funds that helps get liquidity while the post retirement corpus can be taken care of from the NPS annuity. 

For a 20 year old individual, once again the answers of how much to allocate towards NPS would come from a detailed financial plan which will help him ensure that first the monthly flows are captured towards shorter term goals and finally working backwards to understanding how much can be invested into NPS basis their potential monthly liquidity needs. One has to ensure a fine balance and not overdo as liquidity is a big issue with NPS which is at times a double edged sword as it also helps in making forced savings. 

One big benefit to highlight further is the asset allocation part that can be very effectively managed through the NPS route. Unlike mutual funds if we wish to reduce or increase equity, it leads to a capital gains tax incidence, in NPS this has no tax repercussion especially at the time of the switch and the tax impact would only be at the age of 60 at maturity. Though for long term investors would be wise to let equities keep growing, some individuals might prefer a more balanced approach which can help them reduce equities in case of a market euphoria and vice versa. 

NPS is a great vehicle for retirement planning and a must have, however considering the lock in it should be invested into wisely with funds that are not needed until that period of time.

-Vivek Banka (Co-Founder, GoalTeller)