Kolkata: There is a huge number of investors in India who are averse to taking risks. These investors prefer to put their money in instruments that are not only fixed income but also guarantee income or are nearly so. The two instruments that have captivated the imagination of generations of Indians by the virtue of being safe and predictable. These two instruments are fixed deposits (FD) and Public Provident Fund (PPF). An FD is a savings instrument offered by banks and financial institutions. These offer a higher rate of interest when compared to a savings accounts, basically due to the commitment to lock the funds for the specified tenure. The interest rate is fixed for the entire tenure of the FD. The range is between 7 days and 10 years. One has to pay penal charges if one withdraws early.
On the other hand, PPF is a long-term savings/investment scheme that is basically targeted to create a post-retirement pool. It can complement the EPF (Employee’s Provident Fund) or for an individual who is not an employee and does not have an EPF.
FD versus PPF
A Fixed Deposit (FD) is a savings option provided by banks and financial institutions, offering a higher interest rate compared to regular savings accounts. In an FD, the interest rate is fixed for the entire term of the deposit, which can range from a few months to several years. The principal amount, along with the interest, is paid out at maturity. Early withdrawals are typically subject to penalties, making FDs a less flexible but stable investment choice. Interest in an FD is usually compounded annually or quarterly, providing predictable returns. Fixed deposits are ideal for anyone looking for stable and short-to-medium-term investments with fixed interest income.
Public Provident Fund, or PPF, is suitable for long-term planning for retirement corpus. The added bonus is that of income tax savings and compounded growth. The lock-in period is that of 15 years and the current rate of interest is 7.1%. Moreover, one can keep extending the period of interest in blocks of 5 years after the expiry of the 15 years.
Declining interest rate
The declining interest rate regime makes the comparison especially interesting. The maximum tenure for which an FD is issued is 10 years. No major bank pays a rate of interest of 7.1% for an FD of 10 years. Moreover, with interest rates falling in the country, the rates are expected to fall further from the current levels. However, PPF has been paying 7.1% for quite a few years now. Though the PPF rate of interest come up for revision once every three months, it is unlikely that it will move down significantly. Add to it the benefit of complete safety and long term compounding, not to speak of the income tax benefits which PPF investment entails.
India has decidedly entered a declining interest rate regime. It is especially a time when one should consider seriously between two significant investment instruments in this country — Public Provident Fund or Fixed Deposit? Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
