Indian investors today have a several options when it comes to short term and long term investments for wealth creation. Among these options, buying gold and investing in a fixed deposit have more or less been the traditional way of investing. Both investment avenues carry comparatively low-risk when compared to options like equity or bonds. If you are an investor with a low risk profile and are looking to invest in either of the two avenues, there are quite a few factors to consider before deciding which option is better.

Fixed Deposit vs Gold Investment: The Argument for and Against

You can open a fixed deposit (FD) at any bank. It is an investment option that offers you a fixed return over a predetermined tenure. The rate of interest for an FD is generally higher than a regular savings account. It is an investment instrument that comes with a very low to no risk.

Gold is also a relatively low-risk investment option and can be bought easily. However, returns from investment in gold are not fixed and in the short-term, it is possible that the returns are even negative. That being said, historically, gold prices have moved upward over a long period.

Risk Factor

Traditional gold investments like jewellery, gold coins or bars are prone to risk of loss and theft. Even if you choose some digital form of gold, it is prone to risk of price fluctuation.

On the other hand your FD will give you a fixed return. The only risk factor is the bank or financial institution going bankrupt. In India, deposits up to Rs. 5 lakh in banks are insured by the Deposit Insurance and Credit Guarantee Corporation.

Accordingly, FDs carry a lower risk compared to gold investments in India.

Return on Investment Factor

Gold is often used as a hedge against inflation by many investors. Gold prices have also seen quite some fluctuation over the years.

Fixed deposits have guaranteed returns. Every bank has a marginally different rate of interest. At present, rates for a fixed deposit vary between 5% to 6% across banks and also depends upon your investment tenure.

Liquidity Factor

In times of dire need, you can take a loan against gold or sell the asset instantly. Gold is considered an easy asset to sell, be it physical gold or gold alternatives.

On the other hand, FDs come with a lock-in period. You may incur a penalty if you redeem the instrument before the tenure ends.

Can you Take a Loan Against your Investment?

Many financial institutions offer loan against physical gold, which could be in the form of ornaments or coins. Some institutions also offer loan against Sovereign Gold Bonds. You should also note that each institution has its own set of terms and conditions regarding loan against gold.

When it comes to taking a loan against a fixed deposit, many banks offer this provision, especially for their own customers. Each bank has its set of terms and conditions that the investor needs to follow while drawing a loan against their FD.

Taxation

When you sell gold, the returns from the investment attracts capital gains tax. If you sell within three years of your purchase, you pay a short-term capital gains tax. If you sell the gold after three years of purchase, you will pay a long-term capital gains tax on the returns.

Income from FDs attracts income tax at the slab rate your annual income is pegged at. However, you can save tax on the amount you invest in tax-saving FDs, that have a 5-year tenure.

Which Option to Choose to Achieve your Financial Goals?

Deciding on which avenue to choose should depend on the factors discussed above, as well as your own risk appetite and financial goals. If you are drawing a blank after considering these aspects, it might be prudent to get in touch with a financial advisor to curate a bespoke investment plan based on your needs and risk profile.