Fixed deposit v/s PPF: Which suits your risk-averse nature?
What's the story
For risk-averse investors in India, fixed deposits (FDs) and public provident fund (PPF) are two popular investment options. Both provide guaranteed returns and are government-backed, making them ideal for those looking to preserve capital. While FDs offer higher liquidity, PPF comes with tax benefits and a longer lock-in period. Here's a look at the key differences between the two to help you make an informed choice.
#1
Understanding fixed deposits
Fixed deposits are offered by banks and financial institutions where you invest a lump sum for a fixed tenure at a predetermined interest rate. The tenure can range from seven days to 10 years, giving investors flexibility according to their financial goals. The interest rates on FDs usually range between 6% to 7% per annum, depending on the bank and tenure.
#2
Exploring Public Provident Fund
The Public Provident Fund is a long-term savings scheme backed by the government. It has a lock-in period of 15 years but allows partial withdrawals after seven years under certain conditions. The current interest rate on PPF is around 7%, which is compounded annually. The contributions made toward PPF are also eligible for tax deductions under Section 80C of the Income Tax Act.
#3
Comparing liquidity options
Liquidity is an important factor to consider when choosing between FDs and PPFs. FDs provide higher liquidity as they allow premature withdrawals (with penalties) or loans against the deposit before maturity. However, PPF has a longer lock-in period with limited withdrawal options until after seven years.
#4
Evaluating tax benefits
Both fixed deposits and public provident funds offer tax advantages, but in different ways. While interest earned on fixed deposits is taxable according to an individual's tax slab, contributions made towards public provident funds are eligible for deductions under Section 80C of the Income Tax Act. This makes PPF more attractive from a tax perspective for those looking to reduce taxable income.
Tip 1
Assessing risk factors
Risk-averse investors prefer government-backed schemes such as fixed deposits or public provident funds over market-linked instruments such as stocks or mutual funds. This is because they guarantee capital preservation with predictable returns over time. Thus, they fit well within conservative investment strategies focused primarily on wealth preservation rather than aggressive growth targets.