NPS (National Pension System) and SIP (Systematic Investment Plan) in mutual funds are two popular market linked investment options. They help individuals build financial security and achieve long-term goals.
NPS is a government-regulated retirement savings scheme, while SIP allows investors to invest a fixed amount regularly in mutual funds as per their convenience. Both encourage disciplined investing, but still differ in their purpose and some features.
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What makes NPS more attractive is that investments in it reduce your taxable income and a portion of the maturity corpus is also tax free. Such benefits do not come with SIPs, but they give you greater liquidity and flexibility on how you want to handle your money.
Do You Need Both NPS and SIP?
Having both NPS and SIP mutual funds can help create a more balanced financial plan. NPS is designed to build a retirement corpus and has historically given around 10% p.a. Returns. On the other hand, SIPs are designed to achieve different financial goals with more control over your money and returns can vary depending on the equity segment. The right mix depends on your age, income, financial goals, risk appetite, and investment horizon.
But as an investor, you can always worry if NPS and SIP together are hurting your portfolio by increasing concentration. This can happen if both investments put your money into similar stocks, sectors, or asset classes.
For example, if your NPS equity allocation and mutual fund SIPs both invest heavily in large-cap stocks, your portfolio may become overly dependent on the same market segment.
How To Fix Overlap?
You should review where your NPS and SIP investments are and where your money is being spent. If you notice any repeated stocks, sectors, or asset classes, you can decide to diversify accordingly.
If your NPS already has significant equity exposure, you can consider debt-oriented or diversified mutual funds based on your financial goals. In NPS, you can manually decide your equity mix depending on your age. For instance, you can allocate up to 75% in equity if you are 50 years old or younger. This gives you the option to divert your remaining investments towards other assets like public provident funds or fixed deposits or real estate.
If you contribute both towards SIP and NPS, make sure to check your investments at least once a year. If your NPS contributions are already equity oriented, diversifying across assets can help you protect your portfolio from sudden volatility and unexpected financial shocks.
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