When planning for a long-term financial goal, one question often comes up: how different investment options may potentially accumulate wealth over the next 20 years.
Fixed Deposits (FDs), Public Provident Fund (PPF) and mutual funds are among the commonly used options for long-term wealth creation. Each works differently in terms of returns, risk, liquidity and taxation. Rather than focusing only on headline returns, it can be helpful to understand how compounding may influence outcomes over an extended period.
A compound interest calculator can help illustrate this by comparing how the same investment amount may potentially accumulate under different assumptions.
How compounding may influence outcomes over 20 years
To illustrate the impact of compounding, let us assume a one-time investment of ₹1,00,000 held for 20 years. The example uses assumed annual returns of 7% for an FD, 7.1% for a PPF account and 12% for a mutual fund:
| Year | FD (7%) | PPF (7.1%) | Mutual Fund (12%) |
| 5 | ₹1.41 lakh | ₹1.41 lakh | ₹1.76 lakh |
| 10 | ₹2.00 lakh | ₹1.98 lakh | ₹3.11 lakh |
| 15 | ₹2.83 lakh | ₹2.80 lakh | ₹5.47 lakh |
| 20 | ₹4.00 lakh | ₹3.94 lakh | ₹9.65 lakh |
The table shows that even relatively small differences in assumed rates of return may potentially lead to noticeably different outcomes over longer periods. This is because returns, if any, are reinvested and may themselves generate additional returns over time.
The figures shown are for illustrative purpose only
Fixed Deposits: Stability and flexibility
Fixed Deposits are often considered by investors who prefer a relatively predictable return over a chosen investment period. Unlike market-linked investments, FD returns are generally not influenced by day-to-day market movements, which can make them easier to understand and plan around.
Another feature of FDs is their flexibility, as tenures can range from a few days to several years depending on the provider. However, interest rates may differ across institutions and tenures, and the interest earned is generally taxable as per applicable tax laws.
As with any investment, it is important to assess whether an FD aligns with your financial goals and liquidity needs.
PPF: Long-term savings with tax benefits
The Public Provident Fund (PPF) is a government-backed savings scheme designed to encourage long-term wealth creation. It comes with a 15-year tenure, which can be extended in blocks of five years, making it suitable for investors with longer investment horizons. PPF also offers tax benefits on eligible contributions, subject to prevailing tax regulations, which may enhance its appeal as a tax-efficient savings option.
Another notable feature is that interest is compounded annually, allowing returns, if any, to be added back to the account and potentially contribute to future growth over time. Investors can start with relatively small contributions and invest gradually, subject to applicable limits. However, PPF has a lock-in period, which means liquidity may be lower compared to some other investment options.
Mutual funds: Potential for market-linked growth
Unlike FDs and PPF, equity-oriented mutual funds invest in market-linked securities, which means returns are not fixed and may fluctuate over time. One of their key features is diversification, as investments are spread across multiple companies and sectors rather than being concentrated in a single security. Mutual funds are also managed by investment professionals who make portfolio decisions on behalf of investors.
Over longer investment periods, returns, if any, may be reinvested and contribute to the compounding process. However, market movements can affect performance, and actual outcomes may vary from expectations. As a result, mutual funds are often considered by investors who are comfortable with market fluctuations and have a longer investment horizon.
What does the comparison suggest?
Based on the 20-year illustration of a ₹1,00,000 investment using assumed annual returns of 7% for an FD, 7.1% for PPF and 12% for a mutual fund, the mutual fund scenario produces the highest estimated maturity value. However, these figures are purely illustrative and should not be viewed as a prediction or guarantee of future performance.
The comparison also highlights that returns are only one factor to consider when choosing an investment. FDs, PPF and mutual funds differ in terms of liquidity, risk, taxation and return potential.
Rather than focusing solely on the estimated maturity value, it may be more useful to evaluate how each option aligns with your financial goals, risk appetite and investment horizon.
Conclusion
Compounding can play an important role in long-term investing, and the illustration above shows how different return assumptions may influence potential outcomes over time. However, choosing between an FD, PPF or mutual fund involves more than just comparing returns. Factors such as risk, liquidity, taxation and your financial goals also matter. A compound interest calculator can be a useful tool for understanding how investments may grow under different scenarios, helping you make more informed decisions while keeping in mind that actual returns, if any, cannot be guaranteed.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Limited does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
Visit our website for more.