When it comes to investments, most Indians prefer the tried and tested conventional instruments. This mainly includes gold and fixed deposits. Gold investments include buying physical gold, gold mutual funds, gold ETFs, and SGBs to earn high returns, while FDs remain a preferred option for guaranteed income earnings. If you are thinking about investing in any of these two low-risk options, you need to read the following blog on the gold vs FD debate to make an informed choice.

• Gold investments offer higher returns than FDs.
• Investing in gold is slightly riskier since external factors can influence gold prices.
• FDs are better alternatives for investors seeking regular income.

Gold is one of the most revered forms of investment for Indians. Apart from being used as a store of value, the precious yellow metal also serves cultural and aesthetic purposes. In fact, purchasing gold is considered auspicious and sacred on certain days of the year, such as Dhanteras and Akshaya Tritiya. Therefore, the cultural significance of gold remains undisputed.

From an investment viewpoint, gold has historically served as a potent hedge against inflation. Experts suggest including a 10%-15% gold exposure to one’s portfolio for risk mitigation. Indian investors include gold in their portfolios through various instruments like gold bonds, gold funds, gold ETFs, and digital gold. One of the chief advantages of gold investment is the liquidity they bring to the table. Investors can easily access their funds whenever needed. Additionally, physical gold can be used as collateral to secure loans, making the yellow metal a worthy investment choice.

Before we proceed to the gold vs. FD debate, let's understand the concept of FDs. Much like gold, FDs have remained the preferred investment avenue for millions of Indians across generations. A fixed deposit is a risk-free financial instrument that offers assured and guaranteed returns at a fixed rate of interest. The principal invested is redeemable on the set maturity date.

FDs can be opened at banks, NBFCs, and post offices at a nominal minimum contribution of around Rs. 1,000. Fixed deposits allow investors to leverage higher interest rates than regular savings accounts. Ideal for risk-averse investors, FDs ensure guaranteed returns and capital safety, as well as flexible interest payouts.

Risks involved

The first point of comparison in the gold vs. FD debate is the risks involved. Both gold and FDs qualify as low-risk investment options. While the price of gold can be volatile in the short term, the yellow metal has always maintained its value over the long haul. In fact, historically, gold has served as an effective hedge against inflation, even when major global currencies eroded.

FDs, on the other hand, are risk-free investments that offer guaranteed returns. The capital invested in FDs is protected from market fluctuations since FD investments are not market-linked. In fact, bank FDs also come with DICGC insurance of up to Rs. 5 Lakhs/customer to ensure that the FD corpus is protected against bank defaults. All this makes FDs completely risk-free investment options.

Return rate

If you want to find out gold v. FD-which is better, you must consider the rate of return from each of these investment instruments. Gold investments have offered good inflation-beating returns in the past, making them worthy options. The geopolitical instability has further boosted gold prices, enhancing returns. According to data, gold has surged 161% in the last 5 years and 123% over the last decade. In fact, the average annualised return from the gold spot price index has remained 10.4% in the last 5 years.

Fixed deposits have also offered good returns on investment. Unlike gold prices that fluctuate with changing macroeconomic factors, FD rates remain fixed throughout the tenure. This ensures guaranteed and stable returns, which is not applicable to gold investments. Generally, FD rates average around 6%-8% p.a., with senior citizens earning 0.50% higher rates than regular investors. You can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.

Liquidity

A head-to-head comparison of liquidity in the gold vs. FD debate shows a clear preference for gold over fixed deposits. Gold is a highly liquid investment. Investors can easily buy gold and sell the same to redeem their invested funds. While it may be easier to liquidate physical and digital gold, redeeming gold ETF and mutual fund investments is also relatively simple and hassle-free. Additionally, converting physical gold investments to cash results in the loss of the original making charges.

Fixed deposits also offer liquidity benefits to investors. However, the caveat here is the penalty interest payments charged by the financial institutions. In other words, if you wish to withdraw from an FD before maturity, you will first have to pay a penalty fee to the lender.

Loanability

When it comes to loans, the gold vs. FD debate more or less equalises. Most lenders offer loans against gold investments. Generally, you can borrow up to 75% of the gold’s market value as a loan. The LTV or loan-to-value ratio is based on the purity of gold and its weightage.

You can also collateralise your FD investments. Most lenders allow investors to take loans against FDs. Typically, lenders offer up to 90% of the FD corpus as a loan. This means you can borrow more with a loan against your FD than with a regular gold loan. However, you should note that loans and overdraft facilities are not available for 5-year tax-saver FDs.

Income generation

When deciding which is better - gold vs. FD, this is another point of comparison you should consider. Gold investments are not designed for the purpose of income generation. Instead, gold is an asset that can help investors generate wealth over time and act as a hedge against market volatility.

FDs, on the other hand, are prudent income-generation options. Non-cumulative FDs allow investors to choose from flexible interest payout options to meet their regular income requirements. Investors like retirees seeking regular income can leverage FDs to earn monthly, quarterly, bi-annual, and annual income.

Taxation

This is arguably one of the most essential points of contention in the gold vs. FD debate. Gold investments attract a capital gains tax, and the taxation rates vary according to the type of investment. For instance, selling physical gold attracts a 20% LTCG and 4% cess. If gold is sold in the short term, the gains are added to your annual income and taxed as per the applicable tax slab. The same regulations are applicable to gold mutual funds and ETFs as well. For SGBs, the interest income is added to your annual earnings and taxed accordingly.

The taxation on FDs is pretty straightforward. If your annual interest from FD investments exceeds Rs. 40,000 (Rs. 50,000 in the case of seniors), a 10% TDS is applicable. The interest earned from FDs is added to your total annual income and taxed per your income tax slab. If your net income does not qualify for taxation, you can avoid TDS deductions by submitting Form 15G/15H.

The above-mentioned gold vs. FD debate sums up the differences between the two. While both gold and FD are good low-risk investment options, each comes with a different set of benefits and disadvantages. So, if you’re wondering about gold vs. FD, which is better, the answer is hidden in your financial goals and risk profile. If you want good returns over a long-term horizon and a potent hedge against inflation, gold is a good option. However, if you’re looking for steady income and guaranteed returns, which are albeit lower, FDs may be the more prudent option. Returns from FDs remain immune from market fluctuations and large-scale global events, making them safer investment options for completely risk-averse investors. Gold is a slightly riskier option since its prices can fluctuate due to external factors.