PPF vs FD: Which one to choose
What's the story
This article provides a detailed analysis of the historical performance of two of India's most popular investment options: the Public Provident Fund (PPF) and Fixed Deposits (FDs). By understanding their past yields, investors can make informed decisions about how these options have performed over time, and choose wisely for their future investments.
PPF yield
Understanding PPF returns
The Public Provident Fund has long been a preferred long-term investment due to its tax-free nature and steady returns. In the past, PPF rates have ranged between 7% and 9% over the last 20 years. The government determines these rates quarterly, reflecting the current economic climate. This fluctuation underscores the importance of strategic timing when making contributions to a PPF account to optimize returns.
FD trends
FD rates over time
FDs are one of the most secure forms of investment, providing fixed returns over a set period. However, the interest rates for FDs have fallen significantly over the past decade, from an average of 8%-9% to around 5%-6% today. This change is due to the broader economic environment and adjustments in the monetary policy by the RBI.
Tax impact
Tax implications on earnings
A key advantage of Public Provident Fund over fixed deposits is its favorable tax treatment. Public Provident Fund has an Exempt-Exempt-Exempt status, implying that contributions, interest earned, and withdrawals are all tax-free under prevailing laws. On the other hand, interest income from fixed deposits is taxable according to the investor's income tax slab rate. This can significantly reduce the net returns, particularly for investors in higher tax brackets.
Tenure insight
Investment tenure comparison
PPF accounts have a maturity period of 15 years, extendable in five-year chunks. This long term promotes compounding advantages but limits liquidity. On the other hand, FDs provide a wide range of tenures, from seven days to 10 years. This flexibility enables investors to align their financial objectives with investment periods more precisely, although shorter terms typically come with lower interest rates.
Risk assessment
Risk vs reward analysis
Both PPF and FDs offer a safer alternative to equities or mutual funds, serving different financial objectives and risk profiles. Investors looking for absolute safety with guaranteed returns and no market fluctuations might prefer FDs, despite the slightly lower interest rates post-tax. Conversely, if you are looking for a tax-efficient growth over the long term, you should not mind the long lock-in period of PPF.