Difference Between FD and PPF

A fixed deposit is an investment scheme offered by banks where the money you keep in the bank gains returns. This is similar to the case of a savings account, but FDs come with higher interest rates, interest-compounding opportunities and a lock-in period. Usually, the money you invest in an FD is redeemable at the time of maturity. If you choose to divest before the tenure ends, it may attract additional charges, and you may miss out on interest benefits as well, according to the terms of the bank.

FDs are low-risk investment options, but the most significant advantage is their fixed returns. The returns on FDs are fixed.

A public provident fund is a popular long-term investment option backed by the government. It aims to encourage ordinary Indians to build a savings fund. First introduced in 1968, the fund has garnered popularity due to the lower risk associated with investing in it. Similar to FDs, PPFs also give fixed returns.

PPF is exclusively a long-term investment plan. The fund’s maturity is 15 years, with an option to extend further. Many use PPF to build a considerable retirement corpus.

Below are some of the key differences between PPF and fixed deposit.

FDs remain among the most popular investment options due to their several benefits. Below are a few of the top benefits of FDs:

• Fixed Returns: Indians are generally conservative investors who want to save more than they spend from a very young age. When you are from such an upbringing, there is nothing more advantageous than having fixed returns on your investment. Fixed deposits offer precisely that. The returns from FD are from the interest it generates, and there are no market-linked elements, making the returns predictable.
• Compounding: It is a phenomenon that significantly helps your investment in a fixed deposit. It is when your profit from the investment gets reinvested so that the compounded corpus will start to gain interest after that. For instance, if your investment is Rs. 1 lakh and you gained Rs. 7,500 in the first year, the compounded amount of Rs. 1,07,500 will start to gain interest from the following year.
• Flexible: One common downside of FD may be pointed out is the lock-in period. But the same allows banks to give you the interest. But that doesn’t mean FDs are not flexible and your money is stuck. There are multiple options here, including using some banks' overdraft facility. If nothing works, you can withdraw your money by paying additional fees.
• Sovereignty of Government of India: Each depositor in a bank is insured upto a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest by Deposit Insurance and Credit Guarantee Corporation (DICGC), a specialised division of Reserve Bank of India. The agency insurance fixed deposits up to a limit of Rs. 5 lakh per account holder per bank. If the amount exceeds Rs. 5 lakh, including principal and accrued interest, only Rs. 5 lakh will be paid by the DICGC.

The government-backed fund has many benefits. Below are some of them:

• The interest rate offered in PPF investment is 7.1%.
• PPF offers risk-free fixed returns. This is because the money you invest in PPF doesn’t get invested in market-linked securities. Instead, it gains profit from interest. The finance ministry announces the PPF interest rate every year.
• Similar to FDs, PPF also allows your fund to grow through compounding. This can ensure the money you invest gains considerable appreciation in the long term.
• PPFs come under section 80C of the Income Tax Act. This enables you to enjoy tax benefits of up to Rs. 1.5 lakh for your investment in PPFs.
• Even though the tenure of PPF is long, the investor can take advances and loans against PPF when they need money.
• You can start your PPF investment without needing a lump sum. Here, you can build a corpus slowly through monthly instalments.

Interest payments are the most critical part of a fixed deposit. Let us see how to calculate the same. There are two ways to calculate FD interest: simple and compound interest. Some banks use simple interest, while others use compound interest. This may also depend on the tenure of the deposit as well. In most cases, 
FDs with six months or fewer of tenure use simple interest calculation.

Simple Interest

Calculating simple interest is, well, simple. You can do this by using the below equation:

Simple Interest (SI) = P x R x T/100

Where,
P= principal amount; 
R = rate of interest per annum;
T = Time period (in years).

Compound Interest

Its calculation is a bit more complex. Below is the equation for the same.

Compound Interest (CI) = P {(1 + i)^n – 1}

Where,
P = principal amount; 
n = number of years; 
i = rate of interest per period in percentage.

Usually, FDs that give you compounded interest are more beneficial.

For interest calculation, PPF compounds the lowest balance in your PPF account each month. Interest payments happen at the end of each financial year. This interest will be credited regardless of the status of the account.

Fixed deposits give a fixed income without much risk. Hence, it is beneficial for you if you are a conservative investor. Even if you are not a conservative investor, FDs are a wise choice for diversification as your money in FDs is kept safe even during market uncertainty.

Finally, if you have a corpus to park safely, FDs can be a good option, especially for more extended periods.

PPF is for investors who are looking for long-term investment options. Although it allows you to take out an advance or a loan, you can only withdraw from the fund after the maturity date, even by paying a fee. Hence, you should be clear about your decision before investing in PPF.

It remains one of the safest investment options and works best for conservative, risk-averse investors.

Fixed deposits offer a highly flexible tenure ranging from 7 days to 10 years, except for tax-saving FDs with a 5-year lock-in period. Investors can tailor their investment tenure based on their financial needs.

In contrast, the Public Provident Fund (PPF) has a 15-year lock-in period. However, partial withdrawals are permitted after six years (starting from the seventh year). Withdrawals are limited to the lower of two options: 50% of the balance at the end of the fourth financial year or 50% at the end of the preceding year. PPF provides comparatively less investment flexibility when compared to FDs.

The choice between the two investment instruments sums down to your investment goals. If you have a lump sum amount of money you want to appreciate and protect, you may choose an FD. On the other hand, PPF is a corpus-building scheme. You can invest bit by bit to create a considerable corpus over time.

There is no clear-cut answer to which investment vehicle is better for you between FDs and PPF. Both have similar features but differ regarding investment goals. Hence, the wiser option is to determine your objective and invest accordingly.