NPS vs FD Comparison: Both the National Pension Scheme (NPS) and Fixed Deposits (FDs) have their own pros and cons when it comes to investing. The choice between the two depends on your financial goals, risk tolerance and overall financial situation.
NPS and FD are both popular investment options for people in their thirties. However, they have different features and benefits, so the best option for you will depend on your individual circumstances and goals.
Here’s a comparison to help you decide which is a better option for you;
NPS is a pension savings scheme that offers returns in line with the market. Returns depend on the performance of the underlying assets, which are invested in a mix of equity, debt and hybrid funds. The NPS also offers tax benefits, such as tax deductions on premiums and tax-free withdrawals after retirement. However, withdrawals before retirement are penalized.
FD is a debt instrument that offers a fixed rate of return. The interest rate on an FD is fixed at the time of investment and remains the same for the life of the deposit. FDs offer no tax benefits, but are considered a safe investment option.
NPS vs Fixed Deposit: Which is the Better Investment Option?
It depends on your individual circumstances and goals. If you are risk averse and want a safe investment option with guaranteed returns, FD is a good option for you. However, if you are willing to take on some risk in exchange for a potentially higher return, then NPS is a better option.
Returns:
NPS: The returns in NPS are market dependent and can vary based on the performance of the underlying investment funds (stocks, corporate bonds, government bonds, etc.). Historically, equity investments have typically offered higher long-term returns, but they also come with higher volatility and risk.
FDs: Fixed deposits offer a fixed and guaranteed return. However, interest rates are typically lower compared to potential market-related returns.
Risk:
NPS: As mentioned earlier, NPS returns are subject to market fluctuations. While they offer the potential for higher returns, they also carry the risk of losing money if the market performs poorly.
FDs: Fixed deposits are considered low-risk investments because they offer a guaranteed return. Your principal is generally safe and you know what to expect at maturity.
Liquidity:
NPS: NPS has a long lock-in period until retirement (partial withdrawals are allowed under certain conditions). It is designed as a retirement-oriented investment, so it may not be suitable if you need access to your money before retirement.
FDs: FDs offer better liquidity because you can usually withdraw your money before maturity, although you may incur a penalty in the form of a lower interest rate.
Tax Implications:
NPS: NPS provides tax benefits under Section 80C and Section 80CCD(1B) of the Income Tax Act in India. A portion of the investment (up to a limit) is tax deductible and there is an additional deduction for contributions to the NPS.
FDs: Interest earned on fixed deposits is taxable according to your income bracket. There are no additional tax benefits as with the NPS.
Diversification:
NPS: NPS allows you to invest in different asset classes, creating a degree of diversification. This can potentially lead to better risk management and returns.
FDs: FDIs do not provide diversification as your investment is concentrated in a single fixed instrument.
Protection against inflation:
NPS: Because NPS includes equity investments, it has the potential to provide better protection against inflation over the long term compared to fixed returns
FDs: Fixed deposits may not keep pace with inflation over time, potentially eroding your purchasing power.
If you are in your thirties, it is important to start planning your retirement early. By investing in NPS or FD, you can build a corpus that will provide you with a steady stream of income after retirement.
If you’re looking for potentially higher returns and are comfortable with market swings, NPS may be a better option, especially given the tax benefits. On the other hand, if you prioritize safety of capital, guaranteed returns and liquidity, FDs may be a more suitable choice.
Disclaimer: Readers are advised that the best way to decide which investment option is right for you is to talk to a financial advisor. They can help you assess your individual circumstances and objectives and recommend the best investment option.
