Ask anybody to recommend two safe investment options. They are likely to suggest Fixed Deposits (FD) and Provident Funds (PF). Both can be helpful. But choosing between the two can be confusing. So, look at their core differences.

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This article tells you about the features of both. Take a look.

What is a Fixed Deposit?

A fixed deposit is a kind of investment scheme offered by the banks and NBFCs. Here, you invest a fixed sum of money for a fixed duration of time at a fixed rate of interest. Upon maturity, you can withdraw the money you invested along with the interest amounts. You also have the option of renewing the investment under the same terms. Fixed deposits are considered to be safe investment tools as their rates do not change with the fluctuations of the financial markets.

What is Provident Fund?

Provident fund is a corpus that is built up in part by an employee and in part by an employer. The corpus is usually built as a retirement benefit, but withdrawals from PFs are allowed under certain circumstances. This is known as the employee provident fund (EPF).  You can invest in a voluntary provident fund as well and can contribute as an individual and not as an employee of an organisation. The provident fund in India is taken care of by the government. The rate of interest is also fixed by the government and as a contributor to the fund, you cannot modify it.

But before you choose one from the other, let’s look at their returns.

Rate of Return:

Interest Rate in a Fixed Deposit is usually compounded. The final return you get is called the effective return.

For example, an NBFC offers an interest of 8.05% p.a. for a fixed deposit of tenure of 60 months. The interest is made every quarter. So, if you invested Rs 1 lakh, your money would grow to Rs 1.49 lakh. This means, you get an annual return of 8.3%.

However, with a Provident Fund, the interest rate changes every year. So, let’s suppose you get 8% today, you could get 7.5% in the second year, 7.75% in the third year and so on.

In this case, you have to check its CAGR—the compound annual growth rate. This gives you the average annual return. Also, you have to invest every year. Unlike a fixed deposit, you cannot invest in the first year and let it grow. You have to invest at least Rs 500 every year to keep the account active.

Here’s a look at the interest rate you would have gotten had you invested five years back in 2012.

2012-13 9% 8.8%
2013-14 9% 8.7%
2014-15 9% 8.7%
2015-16 9% 8.7%
2016-17 9% 8.1%


Had you invested Rs 1 lakh in a 5-year FD on 1st April 2012-13, it would be worth Rs 1,53,862

Had you invested Rs 1 lakh in a PPF at the same time, and just added Rs 500 every year, then it would be worth Rs 1,53,518.

Also, remember, after 5 years, your PPF will only be partially withdrawable. You will not have access to the whole amount after 5 years. You will have to wait for 15 years to get the entire amount.


Taxes further affect the return you return.

You have to pay 10% tax on interest amounts exceeding Rs 10,000. So, in the above example, your final amount is Rs 1,49,475.8.

This is not applicable on any PPF amounts. You need not pay any tax on the interest payments.

To sum it up:

To sum it up, both provident fund and fixed deposit are good investment options. The core difference between the two is that while an FD is an optional saving, a PF is a compulsory saving. Both help you build up a corpus in a disciplined manner and allow you financial assistance (in the form of loans and withdrawal options) if you really need it. A provident fund helps you to secure your retirement years while a fixed deposit helps you to meet a closer financial target. Both are essential investments that you must carry out.

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