Public Provident Fund (PPF) and fixed deposits (FDs) are the two most popular options for making profitable investments in India. Each offers unique benefits and features to individuals looking for a safe way to optimise their savings. In this article, learn about PPF vs FD and which option is better for investors to fulfil their financial goals.
Meaning of PPF
Public Provident Fund (PPF) is a long-term investment scheme introduced by the Ministry of Finance under the Government of India. It was initiated for individuals to enjoy retirement security along with tax benefits. People can make small investments regularly for good wealth. As PPF is offered by the Indian government, it is entirely safe. It has a lock-in period of 15 years, which makes it a long-standing saving option. An individual can take out money from this account only after 15 years or on an urgent basis if needed.
How to open a PPF account?
To open a PPF account, first, you need to have some documents which are essential to open your PPF account. These are:
- PPF account opening form
- Your ID proof (PAN card, driving licence, Aadhaar card or voter ID card)
- Address proof
- Passport size photographs
- Nominee details
Online Method of Opening a PPF Account
To open a PPF account online, you have to follow the steps given below:
- Log into your online account on your bank’s net banking platform.
- Click on the ‘Open a PPF Account’ option.
- If you want to create an account for yourself, then select ‘Self Account’. And, if you want to create an account for a minor, then select ‘Minor Account’.
- Enter the details required in the application form and double-check the credentials you entered.
- Determine the complete amount you plan to contribute annually to your PPF account.
- You can set an instruction that your amount will automatically be transacted from your savings account to your PPF account according to the set intervals.
- Submit your application. After submitting your application, you will receive an OTP on your registered mobile number.
- Enter the OTP you received to confirm your identity.
- You will receive a message or an e-mail stating the successful opening of your PPF account.
Offline Method of Opening a PPF Account
You can open your PPF account offline as well. To activate your PPF account offline, here are the steps you need to follow:
- Fill in the application form with the essential details.
- Make sure you have all the required documents to open your PPF account.
- Go to the Post Office branch or the bank where you want to open a PPF account.
- Submit the form along with the documents to the representative of the Post Office or the bank.
- Deposit an initial amount using a cheque or DD to open your account.
How to calculate interest rate in PPF?
The interest rate in the Public Provident Fund (PPF) is determined yearly using the balance in your PPF account. Every year the interest is compounded.
The formula for this is: F = P[({(1+i)^n}-1)/i]
Here, F = Maturity amount
P = Annual investments
n = Number of years
i = Rate of interest/100
For example, Riya deposits an amount of Rs 1,20,000 annually in her PPF account at a rate of interest of 7.1% for 15 years. To determine the PPF maturity amount, we use the formula:
F = P[({(1+i)^n}-1)/i]
F = 1,20,000[({(1+0.071)^15)-1}/0.071]*(1+0.071) = Rs. 32,54,569
The PPF maturity amount would be Rs 32,54,569.
What are the advantages of PPF?
It can prove beneficial to open PPF accounts. Here are some advantages that will help you decide if you should open an account.
- Tenure: PPF has a minimum fixed period of 15 years and can be extended on blocks of 5 years if you want.
- Instalment Limit: The minimum limit is Rs 500 and the maximum is Rs 1.5 lakhs in a year.
- Deposit Methods: You can deposit your money in your PPF account by cash, cheque, online transfer or demand draft.
- Government Backed: Since it is government introduced, it is safe to use and ensures returns without risks.
- Withdrawal Facility: Partial withdrawal facility is available.
What are Fixed Deposits?
A fixed deposit is a financial tool provided by banks in which you deposit a certain amount of money for a particular period of time at a specific interest rate. It is a low-risk investment option. And, at the end of the maturity period, the amount deposited and the interest gained are returned to you.
If we talk about PPF vs tax saver FD, a PPF account requires a longer commitment of 15 years, whereas tax saver FDs have a lock-in period of 5 years, making it more convenient for some people.
How to open an FD Account?
You can activate fixed deposit accounts using both online and offline methods.
Online Method
- Log into your preferred bank account
- Click on the ‘Fixed Deposit’ option
- Select the ‘Open FD’ option
- Fill in the details required in the application form with all the relevant documents
- Deposit the amount you wish to invest
Offline Method
- Visit the closest branch of the bank
- Fill in the application form provided by the representative
- Provide the requested documents along with the form and submit it
- Give a cheque for the amount you wish to invest
How is interest rate calculated in FD?
The interest rate in fixed deposits is calculated by the formula given below.
A = P(1+r/n)^n*t
A = Maturity amount
P = Principal amount
r = Rate of interest
t = Number of years
n = Compounded interest frequency
What are the advantages of FD?
Here are some advantages of FD through which you can determine if it is suitable for you to open an FD account.
- Flexible time: You can opt for short- or long-term fixed deposits according to your investment goals.
- Fixed rate of interest: FD provides a fixed interest rate which is higher than that provided in regular accounts.
- Convenience: Investing in an FD account is also trouble-free and straightforward. It allows both online and offline means to make deposits.
- Liquidity: These deposits can be changed into cash. It has no lock-in period.
Differences Between PPF and FD
Criteria | Fixed Deposits (FD) | Public Provident Fund (PPF) |
Issuing authority | NBFCs and banks | Indian government |
Minimum deposit amount | Rs. 100 to Rs. 1000 | Rs. 500 |
Liquidity | Moderate | Low |
Interest rate | Ranges from 2.90-9.05% | Currently, the interest rate is 7.1% |
Joint account | Allowed | Not allowed |
Loan against deposits | Available | Available after 3rd year |
Which is the best for you?
PPF and FDs are both great options for investors. But, all of it depends on your requirements and demands. If you are fine with a 15-year duration, then you can go for a PPF account. If not, then it is better to go with having a fixed deposit. Choosing between PPF and FD comes down to your goals and the risk you can take.