Mutual Funds vs Post Office: Choose the Best Investment Option
Topics Covered
- What is a Mutual Fund?
- What are Post Office Schemes?
- Difference Between Mutual Funds and Post Office Schemes
- Advantages and Disadvantages of Post Office Schemes and Mutual Funds
- Conclusion
With numerous investment options available, you may feel overwhelmed as an investor. Mutual funds and post office schemes are among the most trusted options for achieving financial goals. While some investors prefer post office schemes due to the safety and reliability of the Post Office Savings Bank, others opt for mutual funds because of their diverse options, dividend income, convenience, and fair pricing. Although these schemes promise good returns, they also come with inherent risks. Therefore, it’s about assessing the level of risk you are willing to take.
What is a Mutual Fund?
A mutual fund is a systematic scheme that pools money from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets.
Read More About What is a Mutual Fund
Mutual funds can be broadly classified into various categories:
- Based on Asset Class:
- Equity Funds
- Debt Funds
- Money Market Funds
- Hybrid Funds
- Based on Investment Goal:
- Growth / Equity Oriented Scheme
- Income / Debt Oriented Scheme
- Money Market or Liquid Funds
- Tax-Saving Funds (ELSS)
- Capital Protection Funds
- Fixed Maturity Funds
- Pension Funds
- Gilt Fund
- Index Fund
- Based on Maturity Period:
- Open-Ended Funds
- Closed-Ended Funds
- Interval Funds
- Based on Risk:
- Very Low-Risk Funds
- Low-Risk Funds
- Medium-Risk Funds
- High-Risk Funds
What are Post Office Schemes?
Post office savings schemes are government-backed options that allow investors to deposit a fixed amount each month.
Different Post Office Savings Schemes include:
- Post Office Savings Account (SB)
- National Savings Recurring Deposit Account (RD)
- National Savings Time Deposit Account (TD)
- National Savings Monthly Income Account (MIS)
- Senior Citizens Savings Scheme Account (SCSS)
- Public Provident Fund Account (PPF)
- Sukanya Samriddhi Account (SSA)
- National Savings Certificates (VIIIth Issue) (NSC)
- Kisan Vikas Patra (KVP)
- PM CARES for Children Scheme, 2021
Difference Between Mutual Funds and Post Office Schemes
| Basis of Differentiation | Mutual Funds | Post Office Schemes |
|---|---|---|
| Meaning | A systematic investment scheme that pools money from shareholders to invest in stocks, bonds, money market instruments, and other assets. | Interest rates are fixed and revised by the Government of India. |
| Factors to Consider | Dependent on the money market, economic changes, and performance of securities. | Completely safe as they are government-backed. |
| Liquidity | Purchase and redemption are executed online, adding to liquidity. | Some schemes have a defined lock-in period; withdrawing before this period may incur a penalty. |
| Returns | Flexible returns as they are market-driven. | Guaranteed returns due to contractual nature. |
| Investment Limit | No upper limit. | Limits are capped depending on the scheme. |
| Taxation | Dividends are subject to a distribution tax of 13.84%. If units are sold within a year, they are taxed according to income tax slab; if sold after a year, a 10% long-term capital gain tax is applied. | Tax is applicable only on earned interest as per income tax slab rates. |
| Monthly Investment | Investors can use a Systematic Investment Plan (SIP) for monthly investments. | Allows monthly deposits to accumulate savings. |
| Regulatory Body | Securities and Exchange Board of India (SEBI). | Government of India. |
Advantages and Disadvantages of Post Office Schemes and Mutual Funds
Advantages
- Dividend income from mutual funds can be used to buy additional shares, helping your investment grow.
- Post office schemes offer a safe avenue for stable income due to their guaranteed returns.
- Some mutual funds offer SIPs with a minimum investment as low as ₹100, though generally, ₹500 is the standard.
- Post office schemes cater to various investors, including new parents, senior citizens, and farmers.
- 150,000 post offices in India make it easy to access accounts online, transfer money, and perform other transactions.
- Mutual funds are regulated by SEBI, ensuring compliance with regulations.
- Post office schemes offer guaranteed returns backed by the Government of India.
Disadvantages
- Investment performance in mutual funds is influenced by market conditions from purchase to maturity.
- Investment in monthly income schemes is not tax-deductible; interest income from fixed deposits is taxable under Section 80C of the Income Tax Act, 1961.
- Taxes on mutual funds can be higher compared to post office schemes, and long-term capital gains tax may also apply.
- Asset Management Companies charge fees on exiting mutual funds, which may deter investors from redeeming investments prematurely.
Conclusion
Mutual funds collect money from various investors to invest in equities, bonds, and other securities, whereas post office schemes are investment options provided by the Indian Post. If you are willing to take risks and build a substantial corpus, mutual funds offer a wide range of options. Conversely, if you prefer a risk-free investment with guaranteed returns, post office schemes are a better choice.
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