Mutual Funds vs Post Office: Choose the best investment option

5 mins read
If you are starting to invest your hard-earned money, you need to carefully choose your investment option. Know about safe and trusted investment options.

With so many investing options available, you are likely to be overwhelmed as an investor. Mutual funds and post office schemes are the most trusted investment options for achieving financial goals. While some investors prefer post office schemes, as Post Office Savings Bank is the largest retail bank in the country that offers safe returns, some prefer mutual funds because of their diverse options, dividend income, convenience, and fair pricing. Although these schemes offer extended returns, they also have some underlying risks. So it is all about the calculated risk.

Before we learn the differences between mutual funds and post office schemes, let’s understand what they are. 

What is a mutual fund?

It is a systematic scheme that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets.

Mutual funds can be broadly classified as below based on different criteria:

Based on Asset Class Based on Investment Goal Based on Maturity Period Based on Risk
  • Equity Funds
  • Debt Funds
  • Money Market Funds
  • Hybrid Funds
  • 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
  • Open-Ended Funds
  • Closed-Ended Funds
  • Interval Funds
  • 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 schemes that allow investors to invest a stipulated amount every month.

Below-mentioned are different Post Office Savings Schemes you can choose to invest in.

  • 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 & post office schemes

Now that you know what mutual funds and post office schemes are, read the below table to understand the difference between the two. 

Basis of Differentiation  Mutual Funds Post Office Schemes
Meaning It is a systematic investment scheme that pools or collects money from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets  Post office interest rates are fixed and revised according to protocols by the Government of India.
Factors to Consider They depend on the money market, economic changes, the performance of securities, and more These are completely safe as they are run by the government
Liquidity Their purchase and redemption are executed online, which effectively adds to liquidity In certain post office schemes, there is a defined lock-in period, before which if you withdraw money, it is subject to a penalty
Returns Flexible returns as it is market-driven Guaranteed returns as these are contractual in nature
Investment Limit No upper limit Capped limits depending on different schemes
Taxation  Dividends from mutual funds are subject to a distribution tax of 13.84%. If the units are sold within a year, then you need to pay tax as per your income tax slab, however, if units are sold after a year, a long-term capital gain tax of 10% is levied  Tax is applicable only on the earned interest as per your income tax slab rates
Monthly Investment An investor can invest via a Systematic Investment Plan It allows investors to accumulate money by depositing it every month
Regulatory Body Securities and Exchange Board of India (SEBI) Government of India

To make an informed decision, just knowing the differences between the two might not be enough for you. You need to know the advantages and risks associated with your investment options. In the next section of this article, you will learn about these advantages and disadvantages. 

Advantages and disadvantages of post office schemes and mutual funds

Below table will not only help you understand the advantages and disadvantages of these investment schemes but will also help you to compare them. 

Advantages
Mutual Funds Post Office Schemes
Dividend income can be used to purchase additional shares in the mutual fund, therefore helping your investment grow Considering regularity of income and safety of capital, post office schemes provide a safe avenue for stable income
Some mutual funds offer SIPs as low as ₹100, but the general practice is to insist on ₹500 as the minimum investment for SIPs Post office schemes have different schemes that suit several investors such as new parents, senior citizens, farmers, etc.
Diversification of Mutual Funds helps in reducing risks and helps in building portfolios 150,000 post offices in India enable people to access their accounts online and also transfer money within post office accounts, and to other banks
Securities and Exchange Board of India (SEBI) regulates the mutual funds under SEBI (Mutual Funds) Regulations, 1996 It offers guaranteed returns, as the Government of India backs it
Risks Associated
Mutual Funds Post Office Schemes
Mutual fund is defined by purchase to maturity of bond and market level at entry to exit  Amount invested in monthly income scheme is not tax-deductible, however, interest income from the fixed deposit is taxable under Section 80C of the Income Tax Act, 1961 
Compared to post office schemes, taxes are on a bit high side, and long-term capital gain tax is considered As it is a safe investment option, interest rates are less and thus, suit conservative investors
Asset Management Companies charge a fee when exiting the mutual fund which discourages investors from redeeming investments for some time

Conclusion 

While a mutual fund is an investment vehicle that collects money from different investors and invests it in equities, bonds, and other securities, post office schemes are various investment options offered by Indian Post. If you are willing to take risks and build a corpus, you can choose from a wide range of mutual funds. However, if you are not open to taking risks and don’t wish to take risks, you should stick to post office schemes.