Bank FD vs PPF: What would serve best to risk-averse investors?

FDs and PPFs are low-risk investments with attractive returns. FDs offer fixed returns and liquidity, while PPFs offer tax benefits and potential higher returns.

Abeer Ray, MintGenie Team
First Published30 Sep 2023, 11:57 AM IST
Risk-averse investors can choose between bank FDs and PPF investments based on myriad factors.
Risk-averse investors can choose between bank FDs and PPF investments based on myriad factors.

Both fixed deposits (FDs) and Public Provident Funds (PPFs) are considered low-risk investment options that offer attractive returns. However, it's essential to recognize the key distinctions between the two before making an informed investment decision.

Investing in bank fixed deposits

Bank fixed deposits stand as a dependable and secure investment choice. They offer the flexibility to invest for durations spanning from seven days to 10 years. Regardless of prevailing market conditions, FDs provide a predetermined interest rate on your deposits. Notably, fixed deposits yield higher interest than regular savings accounts. 

For instance, the State Bank of India currently offers interest rates ranging from three per cent to 7.10 per cent for the general public and 3.50 per cent to 7.60 per cent for senior citizens. Small finance banks offer interest rates of up to eight per cent on their fixed deposits with some even offering as high as nine per cent to their senior citizen customers.

Putting money in fixed deposits has its own set of benefits that include:

Returns: Fixed Deposits provide a fixed interest rate for a predetermined period, typically set by the bank or financial institution offering the FD.

Liquidity: FDs tend to be more liquid than PPFs, permitting investors to make premature withdrawals, albeit subject to penalties.

Taxation: Interest earned on FDs is taxable.

Investing in the PPF scheme

You have the option to initiate investments in the Public Provident Fund (PPF) scheme for a 15-year duration. Following the initial 15 years, you have the flexibility to extend the scheme in increments of five years, up to three times. The investment amount can range from a minimum of Rs 500 to a maximum of Rs 1.5 lakh.

Currently, this scheme offers an attractive interest rate of 7.1 per cent on the deposited amount. It's worth noting that premature closure of a PPF account is possible under specific conditions. Importantly, both your income and the maturity amount are eligible for tax exemption under Section 80C of the Income Tax Act, 1961.

Many investors prefer putting their money in PPF accounts due to the following benefits.

Returns: PPFs offer a variable interest rate, adjusted by the government quarterly. These rates are generally higher than those of FDs.

Liquidity: PPFs are less liquid than FDs. Withdrawals from a PPF account are only allowed after five years, with partial withdrawals possible after six years, though they are subject to limits.

Taxation: Contributions to a PPF account are tax-deductible, up to Rs. 1.5 lakh per year under Section 80C of the Income Tax Act. Furthermore, interest earned on PPFs is tax-free.

Difference between FD and PPF investments

The choice between FDs and PPFs hinges on your specific financial circumstances and investment objectives. If you seek a low-risk investment with a fixed return and flexibility in terms of liquidity, FDs might align with your needs. On the other hand, if you aim for a long-term investment with the potential for higher returns and tax benefits, PPFs could be a more suitable choice.

Below is a table summarizing the principal distinctions between FDs and PPFs.

Feature

FD

PPF

Returns

Fixed

Variable

Liquidity

Good

Low

Taxation

Interest is taxable

Contributions and interest are tax-free

In addition to the aforementioned considerations, there exists a multitude of other factors that investors ought to take into account when grappling with the choice between FDs and PPFs. These encompass:

Investment horizon: Determine the duration you intend to invest your funds. FDs are typically more apt for short-term investments, while PPFs are better suited for long-term commitments.

Risk tolerance: Assess your comfort level with risk. FDs offer a more stable, fixed return and are thus less risky. Conversely, PPFs carry a greater degree of risk due to their variable interest rates.

Financial goals: Define your financial objectives. If your aim is to save for short-term goals like a home down payment, FDs may serve you better. For long-term aspirations such as retirement, PPFs could be a more fitting choice.

Which is better: Bank FD or PPF?

Bank FDs stand as a dependable and secure investment choice. They offer the flexibility to invest for durations spanning from a week to 10 years with most of them also having the auto-renewal option, thus, allowing investors to opt for continued FD renewals without visiting the branch time and again. Irrespective of which the market sways, FD investors will always benefit from the predetermined interest rate on their deposits.

Notably, fixed deposits yield higher interest than regular savings accounts. Putting money in a PPF account is a long-term proposition and so must be opted for only by investors willing to have their money locked for 15 long years while availing of the benefit of the compounding effect. Investors should meticulously evaluate all these factors before reaching a decision between FDs and PPFs.

 

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We explain tax saving fixed deposits.
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First Published:30 Sep 2023, 11:57 AM IST
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