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.

Differences

• 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.