The future is always uncertain and so is one's financial stability, which is why it is important to save a certain proportion of one's savings for the future. One of the safest instruments to park your savings is a Fixed Deposit (FD). With a fixed rate of interest being paid on an FD, it is one of the low-risk savings instruments. Another instrument you can use to save for the future is the Public Provident Fund (PPF). Whilst an FD is a medium to long-term savings instrument, a PPF account is a long-term one.

What are Fixed Deposits (FDs)?

Fixed Deposits are deposits accepted by banks, post offices, financial corporations, and Non-banking Finance Companies. Some non-financial entities with a good record of governance are also allowed to accept deposits. In India, the Reserve Bank of India is the regulator of the acceptance and servicing of deposits.

 

The rate of interest on these deposits is determined by the monetary policy announced by the RBI on a periodical basis. It is important to note that the interest rates for FDs vary depending on the tenure of the instrument. FDs are considered to be safe instruments and ones that are not affected by the ever-changing forces of the market.

What is the Public Provident Fund (PPF)?

The Public Provident Fund (PPF) is a tax*-saving instrument for long-term savings. It is a type of safety net investment for the general public to get tax-free* returns on the amount invested by them. You can open a PPF account in any post office across India or with a nationalised bank. It is one of the preferred savings schemes in the country, particularly for those who do not have the surety of a pension after retirement.
 

PPF vs FD

 

Although a Fixed Deposit and a Public Provident Fund are both relatively risk-free instruments for savings, there are certain differences between the two. These differences have been highlighted by the below table.
 

Parameter	Fixed Deposits	Public Provident Fund
Tenure	FDs have a tenure, ranging between 1 year and 5 years.	The tenure of a PPF account is 15 years, which can be further extended.
Withdrawal of interest	There is an option to encash the periodic interest leaving the principal intact. On the other hand, the interest can be cumulated to be encashed on maturity along with the principal.	The interest cannot be encashed and it is added to the balance in the account.
Premature closure	Premature closure is possible in case of need for emergency funds.	Premature closure is not possible before the expiry of 15 years. However, a partial withdrawal is permissible at the end of the seventh year, subject to the balance in the account at the end of the third year.
Interest Rate	The rate of interest is determined by the RBI and the concerned financial institutions based on market conditions and monetary policy.	The rate of interest is fixed at the time of the inception of the account.
Taxability of Interest	The interest on the deposit is taxable.	The interest accrued on this account is not taxable.
Ceiling on Deposits	There is no upper limit on the deposits that can be made.	The maximum amount that can be deposited in a financial year is ₹1,50,000.
Minimum Deposit	The minimum amount of deposits is usually ₹10,000.	The minimum amount that should be deposited in a financial year is ₹500.
Loan against the account	A loan can be availed to the tune of 75% of the deposit amount.	A loan cannot be availed on the prevailing balance.
Term	It can be an investment for the short term and the medium term.	This is an investment for a long-term objective, such as building a corpus for retirement.
Deduction under Section 80C	The investment in an FD does not qualify for tax* deduction under Section 80C of the Income Tax Act, 1961.	The investment in A PPF qualifies for tax* deduction under Section 80C of the Income Tax Act, 1961. .

Besides the above points, on the safety and returns aspects for the two schemes, it can be said that the returns on fixed deposits vary according to the prevailing interest rates considering the economic conditions in the country whereas PPF provides the mandated rate of interest.

FDs in banks and credible institutions are safe while PPF is safe as it is backed by the government. However, PPF is not a liquid investment given its lock-in period whereas FDs can be used for emergency financial needs. Thus, PPF is definitely a good option for retirement planning whilst FDs are somewhat more liquid than the former.

What Are The Other Savings Plans You Can Choose?

The need for savings and investment can never be overstated. Through an adequate strategy that combines the two, you can hope to achieve your financial goals. You are likely to have different financial needs at different points in your life. Therefore, the importance of different factors in your selection of a particular investment also keeps evolving. Aside from FDs and the PPF, there are several other savings schemes available in the market.

A life insurance policy can act as a savings plan in a few ways. One way is through the accumulation of cash value. Some types of life insurance policies, such as whole life plans, accumulate cash value over time. This cash value can grow on a tax-deferred basis, meaning that policyholders do not have to pay taxes on the growth of the cash value until the policy matures or the death benefit is paid out.

Some policies also have a loan facility wherein you can borrow a loan not exceeding a certain percentage of the sum assured on the policy.

Another way that a life insurance policy can act as a savings plan is through the use of riders^#. These are additional features that can be added to a life insurance policy for an extra cost. Some riders, such as the accidental death benefit rider, provide additional death benefits in the event of an accidental death.

Others, such as the premium of waiver rider^#, provides benefits that can be used to cut down on the future premium expenses of the base plan. These riders can act as a savings plan because they can provide additional funds that can be used to pay for expenses that may not be covered by other savings or investment plans.

The death benefits of a life insurance policy payable to the policyholder's beneficiaries on the former's death provides adequate financial coverage for different commitments.

For instance, if you are looking for fixed income security that can help you build a corpus for your post-retirement pension, you can opt for a monthly income plan. On the other hand, if you wish to enhance your wealth and are willing to undertake some risk, you can select a market-linked savings scheme.

Another type of savings plan is a guaranteed¹ income plan that is offered by insurance companies. Guaranteed¹ income plans are savings plans with a life cover and, therefore, provide an additional layer of safety to your family.

Some of the country's leading insurance companies offer these plans. For instance, the Tata AIA savings policies offer some monthly income plans if you wish for a regular income to fulfil your planned financial commitments.

A Guaranteed¹ returns investment plan offers you flexibility in premium payment, benefit payouts, and the addition of the required add-on riders^#. You can pay the premium as a single payment or in the form of periodic payments and you can receive the maturity amount under the policy either as a lump sum or a combination of lump sum and periodic income.

Which Savings Plan You Should Opt For

The ideal savings plan for you depends on your financial plans and capability. Therefore, you must consider your income, your projected expenses for various purposes, your financial and personal goals, the timeline you have in mind for achieving said goals, and your risk appetite while selecting a savings scheme.

Life insurance can be an attractive option for a savings plan because it typically offers a certainrate of return on the money that is invested, and it can provide a death benefit for your beneficiaries in case of an unfortunate eventuality.

Additionally, some life insurance policies accumulate cash value over time, which can be borrowed against or cashed out for the policyholder. This can provide an additional source of savings or investment capital.

However, it is important to note that though life insurance policies are not typically as liquid as other savings options, the life insurance coverage can be as flexible as per your needs and can fulfil a variety of financial needs, right from medical emergencies to handling debts and liabilities.

Also, it is important to understand the different types of life insurance policies and the features they offer. It's always best to consult with a financial advisor before making a decision.

Conclusion

Guaranteed¹ return plans are useful if you are planning for long-term stability, for instance, post-retirement income. In this regard, fixed deposits and PPF are often preferred for their fixed return and low-risk components. However, savings plans with life cover are an optimal way to attain guaranteed¹ regular income. By opting for a monthly income plan, you can have an assured stream of income along with tax^* benefits and a life cover.

L&C/Advt/2023/Jan/0289