In India, gold is not only an investment form, it is considered a status symbol in some cultures and even believed to bring good fortune by many. This is why many Indians prefer investing in physical gold such as jewellery, coins or gold bars instead of choosing other modes of investments like futures and exchange-traded funds. Many families prefer to accumulate gold and pass it on to future generations as part of their legacy.
Some of the other investment options that are preferred by Indian investors include real estate and fixed deposits since these are believed to yield better returns in the future. Real estate requires big investment whereas fixed deposits can be used for small investments.
Here, we will explore the distinct characteristics and benefits of gold as well as FD investments. Investors can look through some of the comparative points before making a selection between the two.
Why Should You Invest in Gold?
In India, certain auspicious days of the year such as, Akshaya Tritiya, Dhanteras, Diwali, etc, see an influx of people who invest in gold. This is because of the belief that buying gold these days can prove beneficial.
Apart from the cultural factor, gold is also considered a good diversification to an investment portfolio as it helps in reducing the overall risk. Many experts recommend about 10-15% of gold investment in a portfolio. This can be bought in the form of gold bonds, ETFs, or fund of funds (FoFs).
The biggest advantage of gold investment is liquidity. Investors like to invest additional funds in these if they can enjoy the flexibility to withdraw whenever a cash need arises. Hence, liquidity is an important feature offered by gold investment. People can buy or sell physical gold at any establishment that deals in this precious metal. Many banks offer low-interest loans against physical gold as collateral.
Additional Reading: Gold Rates In Indian Cities
Why Invest in Fixed Deposits?
A fixed deposit (FD) is a hassle-free investment tool offered at all banks. It guarantees a fixed interest, which is told during account opening. You can open it at any private or government bank or NBFC. When compared with regular savings accounts, FDs offer higher interests. Easy opening, safe and fixed returns make them a popular investment choice among Indians.
If you’re just getting started with investing, then FDs are a great option. You can choose a tenure ranging from 10 days to 10 years. For years, regular Indian investors have relied on FDs to park their funds safely and to build the habit of saving for a rainy day.
Gold vs FD: What are the Differences?
- Risk Exposure - Both gold and fixed deposits are considered as low-risk-free investment alternatives. While the price of gold tends to be volatile in the short term, it has generated positive returns in the long term. It acts as a hedge against inflation and also currency fluctuations. When it comes to FDs, these offer guaranteed returns as per the prevailing interest rate and are not influenced by external factors. However, the returns generated from an FD depend upon the tenure chosen. The longer the FD tenure, the more returns can be generated.
- Rate of Return - Gold investments can generate a substantial rate of return in the long term. This form of investment is worthwhile since it provides inflation-beating results as per historical data. Fixed deposits, on the other hand, offer fixed returns which are pre-decided by the bank at the time of opening of the account. FD returns are guaranteed, no matter the amount deposited. Senior citizens can enjoy higher interest rates (0.50% – 0.75%) in FDs as compared to general citizens.
- Liquidity - Gold investment is a preferred choice among investors who are looking for easy liquidity solutions. Gold investment can be made in various forms like digital gold, Gold ETFs, sovereign gold bonds, Gold mutual funds, etc. These investment forms come without the hassles of storage and making costs generally seen in gold jewellery.
While gold investment is liquid, returns on gold largely depend on market factors. Thus, investors must be well-versed with market conditions before trading in gold. Fixed deposit plans can be liquid depending on the financial institution that these are opened with and its policies.
While fixed deposits can be liquidated before the maturity date, many institutions charge a penalty on such withdrawals. In case an investor requires cash before the FD maturity, it is best to choose banks that offer a penalty-free liquidation of FD.
- Loan Against Investment – Many banks and financial institutions offer a loan of approximately 80% value against gold and FDs. Investors can avail of a loan against fixed deposits and gold from banks, NBFCs (Non-banking financial company) and other financial institutions. These are offered at very competitive interest rates and are usually lower than the rates of unsecured loans such as personal loans.
Since 2020 saw a surge in the value of gold, RBI announced an increase in the LTV or loan to value ratio to 90%. Thus, a gold deposit of Rs. 1 lakh that would have fetched a loan of Rs 60,000-75,000, can now attract a loan of Rs. 90,000. This can greatly benefit investors.
- Income Generation - Gold investments are ideally not meant to generate income. Gold can be looked at as an asset and can help in generating wealth in the long run. In the case of FDs, investors who opt for periodic pay-outs with monthly frequency can get monthly returns. This can help in short-term income generation as compared to blocked funds in the case of gold investments.
- Taxation - Returns from gold are categorized as ‘Capital Gains’ and investors can benefit due to indexation. However, interest earned on FDs is taxable as per the prevailing income tax rates.
Investors who are looking for long term investments in gold can fetch higher returns and also save tax but are dependent on market volatility. FDs can fetch comparatively lower but guaranteed returns and are generally not affected by market fluctuations. Before making an investment choice, investors must conduct due diligence and weigh their risk appetite against the chosen investment.
- Is it better to invest in gold or FD?
Gold and FDs offer different rates of return and across different periods. Gold investments are preferred for liquidity and long-term returns. FDs are preferred for guaranteed returns and hassle-free investment.
- Is it the right time to invest in gold?
Gold is one of the most preferred forms of investment among Indian investors. Since inflation is likely to spike shortly, it makes sense to use gold investment as a hedge.
- Are gold bonds worth buying?
Gold bonds fall under the low-risk investment category and are therefore ideal for investors who have a low-risk appetite. Compared to physical gold, purchasing and selling SGBs is cheaper. Hence, for investors who are considering a long-term investment avenue that can generate good returns, a gold bond can be an ideal choice.
- Can you lose money in a fixed deposit?
Any FD investment with a bank is insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme. This covers deposits up to Rs. 1 lakh for principal component and also interest. Thus, in case the bank goes insolvent, the FD investment remains safe.
- Is it good to invest money in a fixed deposit?
FDs are a safe investment option. For investors who are looking to diversify their portfolio and minimize the risk element, FDs can make for a good investment alternative since these offer guaranteed returns.