Fixed Deposits and Public Provident Fund are two of the most secure investment options available to the Indian investors. Both instruments are ideal options for risk-averse investors. But how do we choose between the two? Here is a guide to understanding the differences and commonalities, both.
What is an FD or Fixed Deposit?
A fixed deposit (FD), also known as term deposit, is an investment instrument that offers customers the option to safely park their savings and earn interest on it too. The interest earned on an FD is always higher than one shall earn in a savings account. As the very name of it suggests, the interest rate, as well as the deposit amount, stays fixed for the entire tenure in a fixed deposit account. FD is available in all the banks, commercial as well as small finance, along with the non-banking financial companies.
Who Should Invest in Fixed Deposits?
Anyone who is looking for a next to nothing risk carrying investment option, a fixed deposit can prove to be quite promising. The returns are calculated at pre-fixed interest rates and a change in market situations does not hamper the interests of an existing customer.
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Amidst COVID-19, where the market is so unstable and risky, if you’re not ready to wet your feet in high risks, you might want to consider investing in a bank or company fixed deposit. However, where a bank FD will carry up to Rs. 5 lakh of deposit insurance coverage by DICGC, company FD would weigh light comparatively. Therefore, looking at the current scenario, we advise you to put your money in a bank (better, in one of the small finance banks since they’re still offering around 8-9% of interest).
Investing in FD will also help you in saving your income tax for up to Rs. 1.5 lakh in a year (with a 5-year lock-in period).
What is PPF or Public Provident Fund?
Public Provident Fund (PPF) is an investment-cum-tax-saving instrument backed by the Government of India. This scheme was launched by the Ministry of Finance more than 50 years ago and it is still popular among investors who like to stay away from market-linked risks. Since PPF is guaranteed by the government, it is 100% secure. Although this is a flagship product of Govt. of India, some of the major banks also offer this scheme as their product. Interest rates for PPF by these banks may differ and fetch higher interest when compared to PPF rates by India Post.
Who Should Invest in PPF?
If you currently do not have a big amount to invest and a risk-less avenue is the one that you’re looking with good returns, then PPF will work well for you. However, unlike an FD, PPF comes with a 15-year lock-in period.
Therefore, if you are okay with regularly keeping a portion of your savings locked for 15 years, then PPF is the scheme for you. The returns are guaranteed with interest rates mostly ranking higher than FD rates by leading banks.
With the ongoing Corona-crisis, it advised keeping enough cash handy. Therefore, right now you may not want to start investing in PPF afresh and wait for a few months. You should take this time to weigh your preferences and invest later when the situation stabilises a bit.
For the existing PPF holders, who have missed the March 2020 deadline, can now contribute to the fund till the 30th of June, 2020. Although, you should keep in mind that this extended moratorium will not fetch any interests for the depositors.
Difference between FD and PPF
The points tabulated below clearly demarcate the points of difference between the two investment avenues available for the Indian investors:
|Parameters||Fixed Deposit (FD)||Public Provident Fund (PPF)|
|Issued by||Banks and NBFCs||India Post and some authorized banks like SBI and ICICI|
|Eligibility||Residents, HUFs, Trust, Corporation Firms, etc. including NRIs||Residents of India only|
|Joint Account||Allowed||Not allowed|
|Time Period||7 days – 20 years||15 years|
(extendable in a block of 1 or 5 years thereafter)
|Deposit Amount (Min. /Max.)||Rs. 100- Rs. 1000||Rs. 500|
|Liquidity||Moderately liquid; premature withdrawals allowed in certain types of FD||Low liquidity; premature withdrawals allowed every year from 7th financial year|
|Interest Payout||Depends on the choice of investor (credit to the linked bank A/c at regular period or on maturity)|
(up to 9.00% p.a.)
|Paid on 31st March of every financial year|
|Changes in interest rates||No definite pattern||Govt. of India quarterly announces FD rates|
|Loan against Deposit||Available||Available only after 3rd financial year|
|Taxation of interest accrued||Tax exemption up to Rs. 1.5 lakh u/s 80 C||Fully exempt from income tax|
|Taxation of deposits made||NA||Deposits qualify for deduction as per IT Act|
How is interest calculated in FD and PPF?
As far as PPF is concerned, interest to be accrued on deposits is compounded yearly. This is fixed for all deposits made in this savings scheme. In case of fixed deposits, there are two ways in which it is calculated, viz. compound interest or simple interest.
To get an estimate of the maturity amount, there are tools like FD Calculator and PPF Calculator available at Paisabazaar.com. These tools are free of cost and can be used multiple times to aid investors in deciding the best option for them at different FD rates/PPF rates and tenure. Basic details like FD interest rates or PPF rate along with deposit amount and tenure are to be filled in the form post which calculator shall show the best estimate as per the inputs entered.
It should be noted that the amount thus calculated by these calculators is only indicative and not absolute.
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Choosing between FD and PPF depends on the needs of the investor, thus when deciding between these two, one should properly weigh the pros and cons of both the instruments.
While PPF is a completely secure option with the guarantee of Govt. of India, it does not offer liquidity for 6 years after which partial withdrawals are allowed annually from the 7th financial year.
When talking about FD, there is an insurance of Rs. 5 lakh on bank FDs. FD is comparatively more liquid an option when compared to PPF. Premature withdrawals, both part and full, can be availed (as per the bank’s or company’s policy).
Therefore, if the goal is to keep the money locked-in safely for a good number of years to be used at a later stage in life, PPF may prove beneficial. In case one wants low-risk investment with decent returns along with the option to prematurely close the account, FD is much better an option.