PPF vs FD: Why India's urban-rural divide shapes investments
What's the story
In India, the financial divide between urban and rural investors influences the choice between Public Provident Fund and Fixed Deposits. Limited access to financial services in rural areas impacts investment decisions. This article analyzes why PPF is favored over FD in urban areas while rural investors lean toward FD, considering factors like accessibility, returns, risk, and liquidity.
Basics
Understanding PPF and FD
PPF is a government-backed, long-term investment scheme with tax-free returns; FDs are short to medium-term investments provided by banks with fixed interest rates. PPF accounts come with a 15-year maturity period, which can be extended indefinitely in blocks of five years. On the other hand, FD tenures can be anywhere between seven days and 10 years, and their interest rates differ from one bank to another.
Access
Accessibility in urban vs rural areas
In cities, both PPF and FD are easily accessible because of the large number of bank branches and post offices. But, rural investors may face difficulties in investing in PPF due to the limited number of post offices or bank branches that provide this service in their area. Conversely, a lot of banks have penetrated rural India, so FD is a more viable option for rural investors.
Returns
Return on investment: PPF vs FD
The government fixes PPF rates every quarter, and they typically range from 7% to 8%, exceeding the 5% to 7% offered by most bank FDs depending on the bank and tenure. While urban investors favor PPF for its superior, tax-free returns. Rural investors perceive FDs as more convenient and simple, hence they rely on FDs for their investment requirements.
Safety
Risk factors considered by investors
Both PPF and FD are deemed secure investment choices, but there exists a minor distinction in their risk profiles, stemming from the entities backing them. PPF investments are backed by the Government of India, rendering them practically risk-free. Conversely, while the Deposit Insurance and Credit Guarantee Corporation insures most bank deposits up to ₹5 lakh, a slight risk persists if a bank experiences financial hardship.
Liquidity
Liquidity needs: Urban vs rural perspectives
Liquidity refers to the ease and speed with which investments can be converted into cash without significant loss in value. Urban investors, with access to other sources of liquidity, opt for Public Provident Fund despite its long lock-in periods, as it offers higher returns. On the other hand, rural investors favor fixed deposits for their short-term flexibility and quick access to funds, catering to their immediate cash needs in emergencies.