PPF v/s FD: Which one to choose?
What's the story
When it comes to saving money, knowing how your investments compound over time is key.
In the US, two common choices are the Public Provident Fund and Fixed Deposits.
While both are great options, they operate under different compounding frequencies, which can make a big difference in your final amount.
This article breaks down these differences to help investors make the best decision.
Compounding 101
The basics of compounding frequency
Compounding frequency is the number of times the interest on your investment is computed and added to the principal amount in a year.
In case of PPF, it is compounded annually i.e. your interest earns interest once a year
Conversely, FDs can offer different compounding options like monthly, quarterly, half-yearly, or annually.
The frequency of compounding can have a significant impact on the final amount you receive at maturity.
Annual Advantage
How PPF stands out
The PPF scheme in India features annual compounding.
Although this may appear less advantageous compared to the quarterly or monthly compounding offered by FDs, keep in mind that PPF typically provides a higher interest rate than most FDs.
Currently, PPF interests hover around 7%. This higher rate, along with the benefit of tax-free returns under Section 80C, makes PPF a highly attractive option for long-term savings.
Flexibility first
Decoding FD compounding options
Fixed Deposits provide the option to select how frequently you want the interest to be compounded—monthly, quarterly, half-yearly, or yearly.
This feature enables investors to tailor their investment approach to their specific financial objectives and cash flow requirements.
For example, an individual looking for a steady income may opt for monthly or quarterly compounding. On the other hand, an investor aiming for long-term growth may select yearly compounding.
Numbers game
Comparing final maturities
To comprehend the power of compounding, imagine investing ₹100,000 in PPF and FD for 15 years without making any further contributions.
Your PPF investment compounds annually at 7%, reaching ₹279,074. Meanwhile, an FD with 6% annual interest grows to only ₹239,655.
FDs compounded quarterly perform slightly better, highlighting the importance of compounding frequency in maximizing returns over the long term.
Strategy matters
Making an informed choice
Deciding between PPF and FD—or any investment—boils down to analyzing potential returns, your liquidity requirements, tax consequences, and risk appetite.
PPF, with its tax-free earnings and higher secure returns, is a clear winner for long-term objectives like retirement.
FDs offer flexibility and are suitable for short- to medium-term goals, depending on your financial circumstances and objectives.