NSC vs PPF vs FD: Which one You Should Choose to Invest

Take Your Pick From FDs, PPF, National Saving Certificate Or Government Bonds
India has traditionally been a “‘fixed income country”. Generations of investors turn automatically to savings instruments like PPF, bank deposits, post office deposits, etc for all their savings requirements. When it comes to investment options there are several in the market to choose from. However, a majority of individuals prefer to walk the path most traveled on and choose to invest their savings offering them fixed returns. These have been the more traditional and stable investment options to choose from. Saving and growth without being linked to market risks are the assurances offered by these instruments. Some are more suited for long term investments while others take care of your short term needs.  The difference between the fixed-income choices varies by  1.5 to 2 percent. People generally ignore that but over time this makes a big difference. Across a couple of decades, a differential of 2 percent a year will add up to a differential of more than 50 percent in the amount you gain. Now you may believe that no one invests for 20 years but that’s not the case. So losing large amounts of potential income happens all the time, to practically every single saver!

To facilitate your future investment planning lets review each of these instruments from the basket of Fixed Deposits, Public Provident Funds, National Saving Certificates, and Government Bonds. An analysis of their features will help you answer the question: what investment instrument suits your financial needs? 

Fundamental Features 

Fixed deposits are instruments where you can make a lump sum deposit with your bank and earn a higher rate of interest (ROI) than your traditional savings account. The amount will be locked in for a specific tenure of the policy. You can only deposit money in a fixed deposit account once. To deposit again, you need to open a new account.

The Public Provident Fund (PPF), on the other hand, is a government-based savings plan, for long-term investment planning. You need to maintain one PPF account and pay annual premiums towards it. With the help of this investment scheme, you can build a corpus for your child’s education. The minimum annual amount that needs to be deposited is Rs 500, while the maximum amount is Rs 1.5 lakh in a financial year.

National Savings Certificate (NSC) is a tax saving option that can be purchased from any post office by an Indian Resident. It is a perfect combination of a fixed return and low risk since it is Government-backed investment. NSC is an apt preference of the risk-averse investors or those seeking to diversify their portfolio through fixed return instruments. The minimum amount required for an investment in NSC is Rs.100 while there is no maximum limit. Principal invested is eligible for tax savings under Section 80C of the Income Tax Act, 1961 up to Rs. 1.5 lakhs annually.

Bonds are fixed-income securities that are issued by the government or companies to raise money for business expansion or financing new projects. They are issued at a discounted price on their face value and can be traded in the secondary market. Thus, an investor earns guaranteed profit, as the bonds are redeemed at the face value upon maturity. These instruments carry a rating and one can opt for the AAA securities which are the safest options. One can avail of Tax benefit under Sec 54EC. The minimum investment is Rs. 10,000 up to a maximum of Rs. 50,00,000

Tenure of investment

Fixed deposits are very flexible with their tenure. With fixed deposits, investors have the freedom to choose between tenures that suit them. Policies for taking fixed deposits have tenures of 7 days to 10 years.

In the case of PPF, the money gets locked in for a period of 15 years, and you can earn compound interest on the same, which is tax-free. However, this can be extended for up to 5 additional years. Hence, PPF is often used to accumulate savings for retirement.

In the case of NSCs, you currently have only 5 years NSC VIII available for subscription

Government Bonds are usually issued for a tenure of 5 to 7 years.

Rate of Interest 

Investment planning often involves comparing the ROI for different financial instruments to know what will be more profitable.

With FDs, the ROI is anywhere between 7% to 8% per year, depending on the bank chosen and its tenure. Company FDs earn a higher ROI with 8% to 10% per year. 

PPF ROI is fixed by the government currently at 7.1% per year.

The National Savings Certificate rate of Interest is subject to periodic change as per the decisions communicated by the Finance Ministry. For the Current Financial quarter (April to June 2020) the applicable NSC interest rate is 6.8%

Returns under Government bonds are at 5.75% per annum

As per your current financial goals and future needs, you can pick out a suitable investment instrument for you and your loved ones. Apart from growing your wealth, protection is the key.  Fixed-income increases in importance as you near retirement and preservation of capital with a guaranteed income stream becomes a more important goal.