In recent years, investors have been drawn to mutual funds instead of small savings schemes like PPF (public provident funds), NSC (national savings certificate), KVP, FD, etc. The Reserve Bank of India's (RBI) data shows that between April and November 2017, deposits worth Rs 40,429 crore were made towards small savings schemes, which is much lower compared to Rs 275,682 crore made for the same period in 2016.
There has also been a significant increase in investments toward mutual funds. One of the major reasons being that while the interest received on small savings schemes have come down after they have been linked to government bonds, (PPF interest rate came down from 8.7 percent in 2016 to 7.6 percent at present) large-cap mutual funds have given investors over 15 percent in annualized returns in 2017.
Increased awareness initiatives from SEBI and AMFI to penetrate the reach of mutual funds to Tier II cities have also popularized mutual funds among retail investors. Marketing efforts and good returns from the equity markets in the past year also helped, while small savings schemes have been promoted very little in comparison by the government.
Similarities between mutual funds and small savings schemes
- You can invest in small amounts in both. Mutual funds schemes have SIPs (Systematic Investment Plans) that allow you to make monthly deposits as less as Rs 500. Similarly, schemes like PPF allow you to make investments as small as Rs 100 with a minimum deposit requirement of Rs 500 per year to maintain the account.
- There are tax benefits on ELSS (equity-linked savings schemes) in mutual funds and tax exemptions on deposits made towards small savings schemes under section 80C.
- Mutual funds do not guarantee a fixed return, if markets perform in your favour, you can get lucky. On the other hand, PPF, NSC, FD will all give you guaranteed returns as per the interest rates promised as these are backed by the government.
- Mutual funds schemes have abundant variety which you can pick up based on your risk appetite and choice of fund manager. Small savings schemes do not have varied options and most of them are long term investments with a minimum of 5 years lock in period. In case of PPF it is 15 years.
Which one is better for you?
Small savings schemes are the most secure investment options as they are backed by the government. So unless there occurs a rare scenario where the government collapses for some reason, you are definitely going to get the returns.
Mutual fund returns, on the other hand, are purely based on the type of fund (large cap, small cap or mid cap) and how the stocks perform in the market. So if you have limited savings that you cannot afford to lose, mutual funds are a risky bargain. You will not lose the money you deposit, but the returns you will stand to get is completely unpredictable, just like the stock market.
It is your intention behind the investment (which life goal are you investing for) and how much risk you are willing to take that will decide what options you must pick. Ideally, it is better not to depend on one kind of investment but rather diversify it in fixed incomes as well as risky ones in a proportionate manner to meet your life goals.