Fixed deposits (FDs) and sovereign gold bonds (SGBs) are popular low-risk investment options in India. Fixed deposits have long been considered one of the safest investments, while sovereign gold bonds have gained popularity since 2015 with the introduction of the Gold Monetization Scheme by the Indian government. When talking about sovereign gold bond vs FD, each option has its advantages and disadvantages. In this article, we will explore gold vs fixed deposit.
Sovereign gold bonds are certificates issued by the Reserve Bank of India, which represent a certain weight of gold. Gold investments offer individuals a convenient and secure way to invest in gold without the need for physical asset storage concerns. These bonds are considered a secure investment option because gold prices tend to be more stable compared to other types of assets. Over time, the value of these bonds typically appreciates, making them an attractive investment choice due to the enduring popularity and high demand for gold.
Sovereign gold bonds offer a distinct opportunity for individuals to invest in gold without the hassle of owning a physical metal. However, like any financial instrument, SGBs have their advantages and disadvantages. Let’s explore both sides of this investment option.
Advantages of Sovereign Gold Bonds
- Interest Payment: Investing in SGBs offers investors a valuable benefit – regular interest payments. The government provides a fixed annual interest rate on these investments, which is paid out twice a year, regardless of whether the price of gold goes up or down. This guaranteed interest adds to the overall return on your investment.
- Paper and Demat Format: Sovereign gold bonds are offered in paper and demat formats. Instead of receiving actual gold, investors receive a certificate that signifies their ownership. This eliminates the necessity for physical storage and related expenses like bank locker fees. Moreover, the electronic format decreases the risk of theft or loss.
- Tax Benefits: Investing in sovereign gold bonds provides tax benefits. The interest earned from SGB investments is not subject to tax deducted at source. Furthermore, investors have the flexibility to transfer the bond before maturity and can enjoy indexation benefits. If the bond is redeemed after maturity, then capital gains tax is exempted, although the interest earned remains taxable according to the investor’s income tax slab.
- Long-term Investment: Although some may view it as a drawback, the 8-year maturity period of SGBs can be advantageous. This extended tenure serves to mitigate gold price volatility and minimise the risk of investment losses. Additionally, investors have the option to redeem the bond after five years from their initial investment, providing them with flexibility.
- Maturity Period: Sovereign gold bonds have a maturity period of 8 years, which may discourage confident investors. However, this extended duration is intended to protect investors from the potential effects of gold price fluctuations. It’s worth mentioning that investors do have the flexibility to redeem the bond after five years if desired.
- Capital Loss Potential: The value of sovereign gold bonds is tied to the global gold price. If the purchase price exceeds the redemption price upon maturity, then investors may experience a capital loss. It’s important to note that the government implements measures to stabilise gold prices. While the risk of capital losses over a 5-8-year investment period is relatively low, it cannot be wholly eliminated.
A fixed deposit is a popular investment option offered by banks and non-banking financial companies. When you invest in an FD, you deposit a specific amount of money for a set period of time at a fixed rate of interest. This interest rate may vary amongst institutions but generally offers higher returns than regular savings accounts.
Fixed deposits offer different maturity periods to suit various investment needs. These periods can range from short-term options of 7-14 days to longer tenures that can extend up to 10 years. It is worth mentioning that a fixed deposit is also known as a term deposit.
Fixed deposits are a popular choice for investors who prefer low-risk investments. They offer various benefits and drawbacks that individuals should consider when making investment decisions.
- Assured Rate of Return: One of the primary reasons individuals opt for fixed deposits is the assurance of a predetermined rate of return. When you choose to invest in a fixed deposit account, you can confidently expect to receive the predetermined rate of interest. Many banks provide online fixed deposit interest calculators to help customers estimate their earnings for a given sum and duration.
- Tax Threshold for Interest: Banks are only obligated to deduct tax on the interest earned from fixed deposits once it exceeds the limit defined by income tax regulations. This is particularly advantageous for small depositors as it allows them to accumulate interest without immediate taxation.
- Flexible Tenure: Fixed deposit tenures can be tailored to suit the depositor’s preferences. While every bank has minimum tenure requirements, depositors typically have the final say in determining the duration. It’s also possible to decide whether to redeem the fixed deposit at maturity or extend it for the same period.
- Easy Liquidation: Liquidating a fixed deposit is relatively straightforward. These days, FDs are booked online. They can be liquidated through net banking. In other cases, most bank branches provide forms for FD liquidation.
- Loans Against Fixed Deposit: Fixed deposits are a dependable financial resource during emergencies. Obtaining a loan against a fixed deposit is a straightforward process. Banks offer varying percentages of borrowing against the fixed deposit amount, typically up to 95%, making it a reliable and secure investment option.
- Reducing Interest Rates: While fixed deposits have their benefits, they may not always match the rate of inflation. In certain cases, the interest earned on fixed deposits might be lower than the current inflation rate. Additionally, with falling interest rates in recent times, this investment option has become less appealing.
- Locked-in Funds: Fixed deposits tie up your funds for a specified period, making them unavailable unless you withdraw prematurely. They lack liquidity and cannot be easily converted into cash.
- Penalties on Withdrawal: Banks impose penalties on depositors who withdraw their fixed deposits before maturity. This penalty often takes the form of a reduced interest rate, lowering the overall earnings.
- No Tax Benefit: The interest earned on fixed deposits is added to the depositor’s taxable income. There are no deductions or exemptions on the interest earned, although senior citizens may receive a deduction of up to Rs 50,000 on their interest income.
- Fixed Interest Rate: The interest rate on a fixed deposit remains unchanged throughout the deposit’s duration. Even if market interest rates increase, the bank does not offer additional interest to the deposit holder.
When deciding between sovereign gold bond vs fixed deposits, it’s essential to understand that both options have their advantages and disadvantages. Your choice for FD or gold should depend on your financial goals, risk tolerance, and the current economic conditions. Sovereign gold bonds offer stability and potential growth for your investment. On the other hand, fixed deposits provide a fixed interest rate, which is suitable for individuals who prefer a low-risk investment option. Ultimately, there is no one-size-fits-all answer to the sovereign gold bond vs fixed deposit question. Your decision should align with your specific financial objectives and comfort level with risk.
Sovereign Gold Bond Vs FD FAQs
Gold vs FD, which is better?
Are there any risks involved with SGBs?
What risks come with fixed deposits?
1. Limited Liquidity: Not all FDs are easy to access before maturity.
2. Insurance Limit: While bank FDs are generally safe, they’re insured only up to Rs 5 lakh in case of a bank default.
3. Inflation Impact: FDs provide fixed returns, but inflation can erode their real returns over time.