FD or PPF? What Is the Best Form of Investment for You?
Hari Sharma and Vinod Malhotra were looking for investment options. While Hari had a short term financial goal of setting up a business, Vinod had long term plans for his daughter’s marriage and his retirement. Hari chose to invest in a fixed deposit for five years as he knew he would be ready to start his firm in that period of time. Vinod, however, went in for a public provident fund (PPF), keeping his retirement goals in mind. He also started a voluntary provident fund so that he could build up a corpus for his daughter’s wedding.
There are different kinds of investment options available in India and you must choose the option that suits you the most. Take a look at this article to find out about the various investment schemes.
Fixed deposits have always been the favourite investment scheme for Indians. FDs are safe and bring in fixed returns. At times, they also provide regular income. Overall, an FD can be a lucrative investment platform to explore.
Some of the common types of FDs are:
- Cumulative fixed deposits
- Non-cumulative fixed deposits
- Callable fixed deposits
- Non-callable fixed deposits
- Flexi fixed deposits
- Tax saver fixed deposits
Speak to your bank or NBFC before you invest to understand which FD is best suited for you.
Another reason why fixed deposits prove to be a good investment is that they allow you to take loans against them. You can pledge your FD as collateral and borrow an amount close to 90% of your FD value at a lower rate of interest. This can act as added motivation for many to take fixed deposits.
Fixed deposits are often compared with provident funds (PF). They both are equally safe. The major difference between a fixed deposit and provident fund lies in the lock in period.
While a PPF has a lock in period of 15 years and an EPF has a lock in period of 5 years, a fixed deposit can have a lock in period of as low as 7 days.
Public Provident Fund (PPF)
Here, you open an account in any Post Office or bank, and deposit amounts of money at regular intervals. You have to pay a minimum of Rs 500 each year while a maximum amount of Rs 1.5 lakh can be deposited annually. The interest on PPF currently is 8%. It is reset every year. You can continue with the account for 15 years. After that, the amount you receive is completely tax free. You can also start withdrawing small amounts from the PPF account after the first five years have passed.
Provident Fund (PF)
There are primarily two kinds of provident funds in India. They are the employee provident fund and the voluntary provident fund. Let us take a closer look at them
- Employee Provident Fund (EPF): Every organisation that has more than 20 employees has to set up a Provident Fund system. Here, every employee pays an annual amount into a contingency fund and the employer pays a similar amount into the fund. This fund currently grows at a rate of 8.65% and acts as a pension fund for the employee. The employee can withdraw or take loans against the EPF if required but that may reduce the fund’s value.
- Voluntary Provident Fund (VPF): As the name goes, a VPF is a voluntary savings scheme where the investor puts in a certain amount of money into a fund from time to time. The fund grows with time and a corpus is built up. This fund can be used as a pension fund or it can be used to meet a future financial requirement (child’s marriage, setting up a business, etc). A VPF is a great tax saving tool as the interest earned is not taxable.
The main difference between a PPF and an EPF is the employer’s contribution. While there is no external contribution in a PPF, the employer pays an equal amount as the investor in the EPF.
While speaking of the differences between an EPF and a VPF, it is easy to understand that an EPF is a compulsory saving while a VPF is a voluntary saving. The VPF, like the PPF, doesn’t have any external contributions either.
Which Is the Best Investment Option?
Now that you know more about the fixed deposits and the provident funds, take your pick wisely. Speak to a financial expert if required. If you wish to have a secure investment for a longer period of time, you can choose FD. If you want to secure your post-retirement days, you can choose PPF. If you want to increase the amount you enjoy after your retirement, EPF might be the one for you. You must be aware of your financial health and your future monetary requirements before you invest. Your investment must not just get you the highest returns, it must also pave the way for a secure financial future for you.