FD vs RD vs PPF vs SIP: how each one works and the questions to ask before choosing

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This article is educational, not financial advice, and it recommends no product. All interest rates and returns below are examples chosen to make the arithmetic clear; they are not current offers or forecasts. Official rates, tax treatment, limits and lock-in periods differ by provider and country and change over time, so check the current rules from the official source before acting. The examples use Indian products, but the ideas apply anywhere.

How each one works

In plain terms:

• Fixed deposit (FD): you hand a bank a lump sum for a fixed term at an agreed rate. Interest is either paid out periodically or compounded and paid at the end. The return is known in advance, subject to the institution paying as promised.
• Recurring deposit (RD): like an FD, but you deposit a fixed amount every month for a fixed term. Each instalment earns the agreed rate from its own deposit date, so early instalments earn longer.
• Public Provident Fund (PPF): a government-backed long-term savings scheme with a long lock-in, an annual deposit limit and a rate the government announces periodically. Interest compounds yearly.
• Systematic investment plan (SIP): not a product but a method. You invest a fixed amount every month into a market-linked fund. There is no promised rate, so the outcome depends on the fund and on market movements.

Compounding in numbers (example rates only)

Compounding means interest earns interest. The examples below use made-up round rates and were computed with a script, so the arithmetic is exact even though the rates are illustrative.

The first two rows show that the compounding frequency matters a little: quarterly compounding gives 1,222.65 more than annual on the same rate. The PPF row simplifies how interest is actually computed (the real scheme uses the lowest balance between certain dates each month), so treat it as a rough illustration. The SIP row assumes a steady 12 percent; real market returns are uneven, and the amount can be lower or higher.

A fixed return is known in advance; a market return is only an assumption until it happens.

Why the SIP number is different in kind

The FD, RD and PPF figures come from a stated rate. The SIP figure comes from a guess. To see how sensitive it is, keep the same 5,000 a month for 10 years and change only the assumed annual return: at 6 percent the end value is about 8,19,397, at 12 percent it is about 11,50,193, and at 15 percent about 13,76,085. Total contributions are 6,00,000 in every case. Real returns also vary year to year, and in some periods may be negative, so the actual result can fall outside that range.

Where they differ

Tax rules deserve special care. They differ by product, by your income, by holding period and by country, and they are revised periodically. Do not rely on a blog or a table, including this one; check the official tax department and the provider's current terms, or ask a qualified adviser.

Questions to ask yourself

Instead of asking which is best, ask what job each rupee needs to do. These questions usually clarify more than a return comparison.

1. When will I need this money? A goal in one year and a goal in twenty years suit different instruments. Money you may need soon should not depend on a market being up that month.
2. How would I feel, and what would I do, if the value fell 20 to 30 percent for a year? If the honest answer is sell in a panic, that tells you something about risk.
3. Do I need a lump sum or a habit? RD and SIP build discipline from monthly income; FD suits a sum you already have.
4. How does the after-tax, after-inflation return look? Divide the nominal gain by what living costs will do. Use the Inflation Calculator to see the real value.
5. What are the exit conditions? Check lock-ins, penalties, premature closure rules and limits.
6. Is the issuer or scheme regulated, and what protections apply? Look at official sources.
7. Am I spreading risk sensibly, or putting everything in one place?

Using the calculators here

The FD Calculator, RD Calculator, PPF Calculator and SIP Calculator on this site let you try your own numbers and see the maturity value. The Lumpsum Calculator is useful for a one-time market investment, and the Step-up SIP Calculator shows how raising the monthly amount each year changes the outcome. The Savings Goal Calculator works backward from a target. Calculators only apply the maths to your assumptions; they cannot predict rates, markets or tax rules.

Frequently asked questions

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