Ideal Investment Options for Beginners – FD and PPF
Posted on Tuesday, March 20th, 2018 | By IndusInd Bank
We all work hard to earn money. Therefore, investing this hard-earned money in the right way is very important to secure the future of our family. We are always on a lookout for investment options that give us higher returns while posing minimum risk. This article will help you understand in depth two financial tools that yield good returns with no or minimum risk: Fixed deposit (FD) and Public Provident Fund (PPF). These are the two most common investment options.
Let us discuss in detail about FD and PPF, the ideal investment options for beginners.
Fixed Deposit (FD)
Fixed Deposit or term deposit is one where the investor makes a lump-sum investment for a fixed duration at a fixed interest rate.
Public Provident Fund (PPF)
PPF is a government-backed long-term investment to provide financial security post-retirement to self-employed or salaried individuals who do not have a structured retirement plan.
Here is a detailed comparison between fixed deposit and PPF to help beginners make a better decision:
1. Lock-In Period: Lock-in period means the maturity time of the investment.
FD: Fixed deposit has a fixed tenure ranging from 7 days to 10 years. One may choose the tenure depending upon his/her requirement.
PPF matures only after 15 years with an option of extending it for more years. Therefore, PPF is a long-term investment.
2. Initial Investment:
FD: The minimum FD amount varies from Bank to Bank. Typically, you can invest a minimum of Rs. 10,000 to start a fixed deposit and there is no upper limit to it.
PPF: The initial and minimum amount required to open a PPF account is Rs. 500 per annum and the maximum amount is Rs. 1.5 lakh per annum.
So, you can deposit up to 1.5 lakh in PPF and the remaining amount in fixed deposit or partial in PPF and partial in fixed deposit.
3. Tax Benefits
FD: Interest of up to Rs. 10,000 per annum on fixed deposit is tax exempted. If the interest amount exceeds Rs. 10,000, then you will be charged TDS (Tax Deducted at Source) at 10% per annum.
PPF: It enjoys the E-E-E status in terms of tax benefits; i.e., the amount, interest, and proceeds all are tax free in PPF.
So, if you are looking for tax benefits, either invest in PPF or go for fixed deposit with a lock-in period of 5 years or more.
4. Premature Withdrawal:
FD: Although fixed deposit is for a fixed tenure, you can withdraw or close your fixed deposit account before its maturity. This premature withdrawal will fetch you a penalty of around 0.5–1 %.
PPF: You can withdraw funds only after the 5th year. This amount is limited to 50% of the previous year’s balance. Also, you cannot make more than one withdrawal in a year.
So, if your pocket allows, it is wise to invest in both fixed deposit and PPF. This way you can keep some funds reserved for immediate emergency while some saved for later use.
5. Loan Facility
FD: You can avail loan or overdraft facility up to 90% of your fixed deposit balance. The rate of interest is generally 2% higher than the fixed deposit interest rate.
PPF: It also offers loan facility, but only after the 3rd year. The amount is limited to 25% of the balance and you have to repay the loan within 24 months. You can take the second loan before the 7th year only if your first loan is amortized. After the 7th year, you cannot avail any loan since you are eligible for partial withdrawals.
Weigh both the investments judiciously and then decide which option suits your requirements best.