Mutual funds (MFs) have become a big draw among investors. However, that comes at the cost of small Savings Schemes like the Public Provident Fund (PPF), NSC, KVP, MIS, and term deposits, among others, which seem to be losing their sheen, as per the latest RBI data. For instance, in the first 8 months of FY2017-18 between April and November 2017, receipts within small savings schemes amounted to Rs 40,429 crore as against Rs 275,682 cr recorded in the corresponding period of the last fiscal. Even the total PPF receipts stood at Rs 1,775 cr as against Rs 5,722 cr received in the same period last year.

So, what does it mean? Small savings schemes no longer remain as popular as before and is it time to dump them in favour of more lucrative schemes like MFs and ELSS?

Experts say that ever since the linking of interest rates of small savings schemes (SSS) with government bond yields in April 2016, small savings schemes have registered a steady decline in their interest rates. On the other hand, “equity mutual funds have registered spectacular returns over the same period. For example, while PPF rates have come down from 8.7% in March 2016 to 7.6% now, many large-cap funds have generated over 15% annualized returns over the same period. Mid-cap funds as a category have registered even higher returns with some clocking annualized returns of over 20% over the last two-year period. This has encouraged retail investors to divert their fresh investments from small savings schemes to equity mutual funds,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

Moreover, AMFI and SEBI have also played a major role in popularising mutual funds among retail investors. While AMFI has run a sustained consumer awareness program to attract fresh investors, SEBI has incentivized mutual fund houses to increase their penetration beyond Tier I and Tier II cities by allowing higher total expense ratio for investments sourced from such locations.

“The reasons for the gaining popularity of mutual funds over the last few years are the brilliant returns generated from the stock markets by the equity schemes plus sustained marketing and distribution efforts from the industry. In contrast to the small saving schemes offering fixed but low single digit returns, the mutual fund schemes, especially the equity ones, have generated double digit annualised returns over the last 5 years,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

Also, mutual funds are by and large private sector players and push their products through regular advertisements on television and other media channels. There is also a robust distribution network of independent financial advisors, banks, brokers and financial analysts soliciting business for mutual funds and also servicing their clients. Compared to this, small saving schemes promoted by the government have no organized distribution channels and very little promotion efforts.

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