Mutual funds vs NPS: Short-term flexibility vs long-term security, which one suits you better?

Many urban professionals earning ₹25–50 lakh a year believe mutual funds deserve every extra rupee they can spare, while the National Pension System (NPS) is best ignored. Ask them why, and the same ideas come up again and again. They say NPS gives lower returns than equity mutual funds, that the lock-in till 60 is a major drawback because they want liquidity, and that mutual funds are simply easier and more flexible to manage.

Because of these beliefs, crores of salaried Indians in the 30% tax bracket continue to invest post-tax money into mutual funds, while leaving behind one of the strongest combinations of tax advantage and forced long-term discipline available to them in 2025–26.

“The hidden truth nobody talks about: For anyone in the highest tax bracket with employer offers corporate NPS, the pre-tax contribution alone puts 43–45% more capital to work from day one. Add ultra-low costs, partial tax-free withdrawal and forced long-term behaviour, and the same 10–12% gross return in NPS creates higher retirement wealth than an equity mutual fund,” said Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance.

Key Insight: Corporate NPS invests 43% more capital (pre-tax) + ultra-low costs + partial tax-free withdrawal → beats mutual funds even at the same gross return. Lock-in is a feature, not a bug—SEBI data shows ~97% MF redemptions happen within 3–5 years.

Where mutual funds win hands-down

Mutual funds clearly come out on top when your goals are closer at hand and flexibility matters more than tax deferral. "If you need money in the next three to ten years for things like a child’s education, a home down payment or building an emergency buffer, mutual funds are far more suitable because your money is not locked away.

They also make more sense if you fall in the 0–20% tax bracket, where the pre-tax advantage of products like NPS largely disappears. Above all, mutual funds appeal to investors who want full control over their money, with the freedom to withdraw at any time and no compulsion to buy an annuity later in life," said Tandale.

Where NPS is mathematically unbeatable

NPS becomes mathematically hard to beat in particular situations. Tandale said, "If you are a salaried employee in the 30% tax bracket and your employer is contributing 10–14% of your salary to NPS, the tax advantage alone gives it a huge edge. It works best when your investment horizon is long, ideally more than 15 to 20 years, allowing compounding to do its job."

NPS makes sense if you want at least a part of your retirement savings to turn into a lifelong pension, providing a steady income long after your working years are over."

The 2025 Game-Changers in NPS

The October 2025 reforms have significantly modernised the NPS investment framework. Under the Active Choice option, subscribers can now allocate up to 100% of their contributions to equity, removing one of the biggest limitations for long-term, growth-focused investors.

In addition, the system now offers a broader range of pension fund managers, daily NAV disclosures, and same-day fund switching, making portfolio management more responsive. Improved digital platforms have also made tracking, switching and servicing far easier, bringing NPS closer to the ease and convenience that investors are used to with mutual funds.

The Pension Fund Regulatory and Development Authority (PFRDA) has announced wide-ranging changes to exit and withdrawal rules under the National Pension System (NPS), giving subscribers more flexibility over their retirement savings. Under the amended regulations, subscribers from government, non-government and NPS-Lite categories can now remain invested until the age of 85, unless they choose to exit earlier. PFRDA has also allowed deferment of both lump-sum withdrawals and annuity purchases up to age 85.

At retirement, at least 20% of pension wealth must be used to buy an annuity, unless the total corpus is ₹8 lakh or less, in which case the full amount can be withdrawn. The rules also introduce provisions for missing subscribers, recognise NPS accounts as collateral for loans, and allow full withdrawal for those who renounce Indian citizenship.

Conclusion

If you had to pick only one, a 30% taxpayer with 20+ years to retirement should choose corporate NPS today – the math is unbeatable. But personal finance is never the only one. Mutual funds give you wings for the journey. NPS gives you a parachute for the landing. “In 2025, the smartest portfolios are not MF-only or NPS-only. They are MF + NPS – in the right proportion, at the right life stage,” said Tandale. NPS is a virtually commission-free product. That’s exactly why most agents and relationship managers never push it aggressively — there is no strong incentive for them. Consult a SEBI-registered advisor for unbiased advice.