PPF vs FD: The Key Differences

Having a savings fund is one of the most important factors that determine your financial health. Be it your retirement fund or an emergency fund for a rainy day, proper savings ensure you don’t have to depend on high interest loans or credit cards during a period of crisis.

Now, there are plenty of investment options out there that you can choose from to build this fund. But choosing an instrument randomly is not the way to go about it. Instead, you should research all the options, understand the underlying risk with respect to different investments  and their alternatives, and mitigate before coming to a decision. Public Provident Funds (PPFs) and Fixed Deposits (FDs) are two such options you can consider. In this article, we will understand what are the key differences between PPF and FD and which one to choose based on your financial needs.

What is a Fixed Deposit (FD)?

A fixed deposit is an investment scheme offered by banks where the money you keep in the bank gains returns. This is similar to the case of a savings account, but FDs come with higher interest rates, interest compounding opportunity and a lock-in period. Usually, the money you invest in an FD is redeemable at the time of maturity. If you choose to divest before the tenure ends, it may attract additional charges, and you may miss out on interest benefits as well, according to the terms of the bank.

FDs are low-risk investment options, but the biggest advantage is their fixed returns. The returns on FDs are fixed

Benefits of Fixed Deposits

FDs remain among the most popular investment options due to their several benefits. Below are a few of the top benefits of FDs:

Fixed Returns 

Indians are generally conservative investors who want to save more than they spend from a very young age. When you are from such an upbringing, there is nothing more advantageous than having fixed returns on your investment. Fixed deposits offer exactly that.

The returns from FD are from the interest it generates, and there are no market-linked elements, making the returns predictable.

Compounding

It is a phenomenon that greatly helps your investment in a fixed deposit. It is when your profit from the investment gets reinvested so that the compounded corpus will start to gain interest thereafter. For instance, if your investment is Rs. 1 lakh and you gained Rs. 7,500 in the first year, the compounded amount of Rs. 1,07,500 will start to gain interest from the next year.

Flexible

One common downside of FD that may be pointed out is the lock-in period. But the same allows banks to give you the interest.

But that doesn’t mean FDs are not flexible and your money is stuck. There are multiple options to choose from here, including using the overdraft facility some banks provide. If nothing works, you are free to withdraw your money by paying some additional fees.

Sovereignty of Government of India

Each depositor in a bank is insured upto a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest by Deposit Insurance and Credit Guarantee Corporation (DICGC) a specialised division of Reserve Bank of India.

The agency insurance fixed deposits up to a limit of Rs. 5 lakh per account holder per bank. Incase amount exceeds Rs. 5 lakh including principal and accrued interest only Rs. 5 lakh will be paid by the DICGC.

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

How is Interest Calculated on FDs?

Interest payments are the most critical part of a fixed deposit. Let us see how to calculate the same. There are two ways to calculate FD interest: simple and compound interest. Some banks use simple interest while others use compound interest. This may also depend on the tenure of the deposit as well. In most cases, FDs with six months or fewer of tenure use simple interest calculation.

Simple interest

Calculating simple interest is, well, simple. You can do this by using the below equation:

Simple Interest (SI) = P x R x T/100

Where

P= principal amount; R = rate of interest per annum; T= time period (in years).

Compound interest

Its calculation is a bit more complex. Below is the equation for the same.

Compound Interest (CI) = P {(1 + i)^n – 1}

Where, P = principal amount; n = number of years; i = rate of interest per period in percentage.

Usually, FDs that give you compounded interest are more beneficial.

Who should invest in fixed deposits?

As discussed above, fixed deposits give a fixed income without much risk. Hence, it is a beneficial option for you if you are a conservative investor.

Even if you are not a conservative investor, FDs are a wise choice for diversification as your money in FDs is kept safe even during market uncertainty.

Finally, if you have a corpus to park safely, FDs can be a good option, especially for longer time periods.

What is a Public Provident Fund?

A public provident fund is a popular long-term investment option backed by the government. It aims to encourage ordinary Indians to build a savings fund. First introduced in 1968, the fund has garnered popularity due to the lower risk associated with investing in it. Similar to FDs, PPFs also give fixed returns.

PPF is exclusively a long-term investment plan. The fund’s maturity is 15 years, with an option to extend further. Many use PPF to build a considerable retirement corpus.

Benefits of PPF

The government-backed fund has many benefits. Below are some of them:

● PPF provides risk-free fixed returns. This is because the money you invest in PPF doesn’t get invested in market-linked securities. Instead, it gains profit from interest. The finance ministry announces the PPF interest rate every year.

● Just like with FD, PPF also allows your fund to grow through compounding. This can ensure the money you invest gains considerable appreciation in the long term.

● PPFs come under section 80C of the income tax act. This enables you to enjoy tax benefits of up to Rs. 1.5 lakh for your investment in PPFs.

● Even though the tenure of PPF is long, you have the option to take PPF advances and loans when in need of money.

● You can start your PPF investment without needing a lump sum. Here, you can build a corpus slowly through monthly instalments.

How is interest calculated in a PPF?

For interest calculation, PPF compounds the lowest balance in your PPF account each month. Interest payments happen at the end of each financial year. This interest will be credited regardless of the status of the account.

Who should invest in a public provident fund?

PPF is for investors who are looking for long-term investment options. Although it gives you the option to take out an advance or a loan, there is no way for you to withdraw from the fund before the maturity date, even by paying a fee. Hence, you should be clear about your decision before investing in PPF.

Having said that, it remains one of the safest investment options and works best for conservative, risk-averse investors.

PPF vs. FD: Key Differences

Below are some of the key differences between PPF vs fixed deposit.

FD vs. PPF: What Should You Pick?

The choice between the two investment instruments boils down to your investment goals. If you have a lump sum amount of money you want to appreciate and protect, you may choose an FD. On the other hand, PPF is a corpus-building scheme. You can invest bit by bit to create a considerable corpus over a more extended period of time. 

Key Takeaway

There is no clear-cut answer to which investment vehicle is better for you between FDs and PPF. Both have similar features but differ regarding investment goals. Hence, the wiser option is to figure out your goal and invest in accordance with it. 

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