The Better Investment: Gold vs. Fixed Deposit

The Better Investment: Gold vs. Fixed Deposit

The festival of lights is also an auspicious time to start new things. Many people plan new investments during Diwali. There is a range of investment options to choose from including equities, mutual funds, fixed deposits, gold, real estate, etc.

If you are planning to invest this Diwali, and are looking for low-risk avenues, then gold and fixed deposits are good options to consider. While some people might argue that gold is a risky investment since its price can drop due to external parameters, as compared to stocks, gold is considered safer since it always has value and is an excellent hedge against volatility. So, which one should you opt for? How do you choose between the two? Here are some points that can help you make the decision.

Gold Investment

In India, Gold has been an investment of choice for centuries. There are certain auspicious times of the year like Akshaya Tritiya, Dhanteras, Diwali, etc. when buying gold is considered especially beneficial. Hence, many people wait for the entire year before making the purchase during these times.

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Culture aside, gold is also considered to be a good addition to an investment portfolio since it reduces the overall risk of the portfolio. Many investment experts recommend around 10-15% of the portfolio to be dedicated to gold or gold-related investments like gold bonds, gold funds, ETFs, or fund of funds (FoFs).

The biggest advantage that drives gold investment is liquidity. Most investors are willing to invest more if they have the flexibility to withdraw their funds whenever the need arises. Hence, liquidity is an important feature sought by them. Physical gold can be bought and sold at any establishment dealing in the precious metal with ease. Further, many banks offer loans against gold as collateral at lower rates. This makes gold a good choice for an investment.

Fixed Deposit Investments

A fixed deposit (FD) is a financial instrument that guarantees a fixed rate of interest until a given maturity date. One can open it at any private or government banks or NBFCs. FDs provide investors with a comparatively higher interest rate than a regular savings account and also have many other advantages that make them a preferable option for investment. For novice investors with a lower risk appetite, FD is one of the ideal options to start their investing journey with. Furthermore, FDs help to inculcate a habit of dedicated savings.

The Better Investment: Gold vs. Fixed Deposit

1. Risks Involved

As mentioned earlier, both gold and fixed deposits are low-risk-free investment options. Although the price of gold can be sometimes volatile in the short term, it has always maintained its value over the long haul. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment that is worthwhile. On the other hand, FDs offer guaranteed returns and are free from external considerations, but again, it depends on the tenure chosen. The longer the tenure more is your return.

2. Rate of Return

Gold investments can offer you a substantial rate of return. Gold investment is worthwhile as it has provided inflation-beating results in the past. One interesting fact: as per an ET Wealth report, investors who purchased gold on every Dhanteras for the past five years have earned 17.9% CAGR return while over the 10 and 15-year period, investors have earned 10.7% and 11.9% return respectively. Higher returns over the last five years have been attributed to the surge in gold prices over the past year. Gold prices have spiked up by 34% from the last Dhanteras day.

Fixed deposits, on the other hand, provide fixed returns which are set by the bank during the opening of the account. Now, the best thing about FDs is that the returns are guaranteed, irrespective of the amount that you deposit. Senior citizens have the provision to avail higher interest rates (.50% – 0.75%) as compared to general citizens.

 3. Liquidity

When it comes to ease of liquidity, gold is the preferred choice among investors looking for a quick buy-in. Investments in gold can be made in a number of ways. Digital gold, Gold ETFs, Gold mutual funds, sovereign gold bonds, etc have become a popular choice as they give you the return benefits of gold without the risks and hassles of storage and making costs.

However, the returns on gold will largely depend on market situations, so, investors must be aware of the market conditions before buying or selling gold. In the case of fixed deposit plans, liquidity entirely depends on which financial institution you have chosen and what are their deposit policies.

While you can liquidate your fixed deposit before the maturity date, most institutions levy penal interest on such withdrawals. If you think you might be in need of money before the FD maturity, look for companies that offer a penalty-free exit in case you choose to invest in FD. 

4. Loan Against Investment

One can avail a loan of about 80% of the value against gold and FDs respectively. You can easily avail a loan against your respective fixed deposits and gold from banks, NBFCs (Non-banking financial companies), and several other financial institutions at competitive interest rates which are usually lower than the interest rates levied on personal loans.

Owing to the lockdown this year, the value of gold increased drastically and RBI even increased the LTV or loan to value ratio to 90%. So a deposit of Rs 1 lakh of gold which would provide you with a loan of Rs 60,000-75,000 earlier, will now fetch you a loan of Rs 90,000.

RiskBoth Gold and FD are low-risk investments.
Market natureAlthough Gold price is a bit volatile in nature as it depends upon macroeconomic factors, FDs are fixed-income instruments with zero volatility. However, the volatility in gold prices can also lead to higher returns and it has always maintained its value over the long term.
ReturnsGold has provided a CAGR of 9.8% over the last 30 years., On the other hand, FDs have provided a CAGR of around 8%. 
LiquidityFDs can be flexible depending on the tenure selected. With the introduction of other forms of gold investments such as gold ETFs, gold investment has also increased the flexibility significantlyThe time taken to liquidate either of them will depend upon the institution and nature of redemption. 
Income GenerationGold investments are not designed to generate income. Gold is an asset and can help you generate wealth over time and mainly acts as a hedge against volatility. However, in the case of FDs, if you choose periodic payouts, and select a monthly frequency, you can get monthly returns.
TaxationReturns from Gold will be categorized as ‘Capital Gains’ and one can benefit from indexation. However, interest from FDs is taxed at the existing slab rates for income tax.

 The Bottom line

Both FD and Gold investments are low risk and can help you build a good corpus in the long run. In a nutshell, if you are looking for long-term investments in Gold, you can gain from higher returns as well as save on tax; not to mention, a bit of market volatility sometimes. On the other hand, FDs can give you comparatively less but guaranteed returns and are not affected by market fluctuations. However, after considering the above factors, you can conduct due diligence and invest as per your risk appetite and financial goals this Diwali.

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