FD, PPF or SIP: Choosing Between Them

The question "which gives the best return" has no useful answer, because the instrument with the highest expected return is also the one that can be down 30% exactly when you need the money.

The question that does have an answer is "when will I need this, and what happens if it is worth less then?"

• Money you might need this year: a savings account or a short fixed deposit. Return is not the point; availability is.
• An emergency fund: liquid and untouched. Never in a market-linked instrument, and never in something with a lock-in.
• A goal three years away — a car, a deposit, a wedding: fixed deposit or debt instruments. Three years is too short to absorb a market fall.
• Retirement, or a child’s education fifteen years out: this is where equity’s long-run potential and PPF’s tax-free compounding both do their work.

Fixed deposit interest is fully taxable at your slab rate, in the year it accrues. For someone in the 30% bracket, a 7% deposit returns about 4.9% after tax.

PPF is exempt at all three stages — the deposit qualifies under 80C in the old regime, the interest is tax-free, and so is the maturity amount. A tax-free 7.1% beats a taxable 7% by a wide margin for anyone in a higher bracket.

Then subtract inflation. At 6% inflation, that 4.9% post-tax deposit is losing purchasing power every year while the balance grows. This is the single most under-appreciated fact in Indian personal finance.

A SIP is a way of investing, not an asset class. The return depends entirely on what you invest in — an equity fund, a debt fund and a gold fund behave very differently.

It removes the need to time the market, and it matches how salaried people actually accumulate money. It does not remove market risk, and any projection at a constant 12% is illustrating a mechanism, not forecasting an outcome.

Over a long enough period and with contributions maintained through falls, that risk has historically been rewarded. Over three years, it may simply be risk.