FD vs Gold: The safety of a fixed deposit or the brilliance of gold? Which investment will yield stronger returns?

FDs offer fixed interest rates and security, while gold offers strong returns against inflation. But which option is best for your goals? Learn the pros and cons here and decide for yourself.

When a lump sum of money comes into your hands, people often wonder where to invest it to earn good returns and keep their money safe. There are many investment options available, but the two most popular and reliable options are fixed deposits (FDs) and gold. Both have their own advantages and disadvantages.

While FDs promise fixed returns and security, gold offers a hedge against inflation and cultural significance. But the real question is, which of these two options will yield higher returns and better suit your financial goals? Learn about the various aspects of gold and FDs here and decide for yourself which option is best for you!

Fixed Deposit (FD): A Companion to Security and Guaranteed Returns

Fixed deposits, as the name suggests, are investments where you deposit your money with a bank or financial institution for a fixed period and receive a fixed interest rate in return. It is considered one of the safest investment options, especially for those who are risk-averse.

Advantages of FDs

Fixed returns: You know in advance how much you will receive upon maturity. The interest rate remains fixed for the entire term.

Low risk: FDs offered by banks and NBFCs (non-banking financial companies) are considered quite safe. The DICGC (Deposit Insurance and Credit Guarantee Corporation) provides insurance cover on FDs up to Rs 5 lakh.

Liquidity: You can break your FD in case of an emergency, although this may incur some penalty. You can also take a loan against the FD.

Different Tenures: You can open an FD for a tenure ranging from 7 days to 10 years, depending on your needs.

Proof of Income: Interest earned on an FD is part of your regular income, which must be declared when filing your Income Tax Return (ITR).

Disadvantages of FDs

Low Returns: FD returns are often lower than investment options like the stock market or mutual funds.

Impact of Inflation: Returns on FDs are often lower than the inflation rate, which means the purchasing power of your money may decrease over time.

Tax: Interest earned on FDs is taxed according to your tax slab. If the interest exceeds ₹40,000 (now ₹100,000 for senior citizens) in a financial year, the bank deducts TDS (Tax Deducted at Source).

Current FD Returns

These days, major banks typically offer 6% to 7.5% annual interest on 1- to 5-year FDs. Senior citizens receive a 0.50% higher interest rate.

Gold: Luster, Culture, and Inflation Hedge

Gold holds great significance in Indian culture. It is considered auspicious and is widely purchased for occasions like weddings. However, gold's importance extends beyond traditional values, as it also serves as an investment option. It is seen as an emergency fund and a hedge against inflation.

Gold's Advantages

Hedge against inflation: When inflation rises, the value of the currency decreases, leading to an increase in gold prices. It is considered a good hedge.

Safety and Liquidity: Gold is a tangible asset that can be converted into cash at any time. It is globally recognized.
Portfolio Diversification: Including gold in your investment portfolio provides stability, especially during periods of stock market decline.

Cultural and Emotional Significance: In India, gold is seen not only as an investment, but also as a status symbol and a treasure.

Investment in Different Forms: You can invest in gold through physical gold (jewelry, coins, bars), gold ETFs, Sovereign Gold Bonds (SGBs), or gold mutual funds.

Drawbacks of Gold

Risk: Its prices depend on the international market and the strength of the rupee, so they can fluctuate in the short term.

Concerns about Safety and Purity: Keeping physical gold at home poses the risk of theft. Storing it in a locker incurs costs. Purity is also a concern when buying jewelry.

No Income: Unlike FDs, gold does not provide you with regular income (except for SGBs). You benefit from this when you sell it at a higher price.

Tax: If you make a profit from selling physical gold, capital gains tax is applicable. Selling before 3 years attracts short-term capital gains (as per your tax slab), and selling after 3 years attracts long-term capital gains (20% tax with indexation benefit).

Which is better against inflation?

Inflation in India has averaged 5%–6%.

FD interest rates of 6.5%–7.5% slightly beat inflation, but the net return after tax remains at 4.5%–5%.

Gold tends to rise during times of inflation. In the long run, gold prices rise faster than inflation.

Which to choose: FD or Gold?

Short-term needs: For 1–3 years, FD is better because of the fixed returns and lower risk.

Long-term goals: For 5 years or more, gold, especially SGB, can beat inflation and also offer tax benefits.

Diversification: Wise investors maintain a balance between the two. For example, investing 6 lakh rupees out of 10 lakh rupees in FD and 4 lakh rupees in gold can be a safe strategy.