7 Key differences between Fixed Deposit and Gold

Are you looking for a low-risk investment option to invest your savings? Usually, the top two safe investments that Indians prefer are gold and Fixed Deposits. Gold is an essential part of Indian culture, and you must have seen tremendous growth in its prices over the years. Also, it is not difficult to sell gold in the Indian market. On the other hand, putting your money in a Fixed Deposit means guaranteed returns at a very low risk.

Gold vs. Fixed Deposit: Key differences

If you have some savings, should you prefer an FD or a gold investment? Before deciding on one option, you need to understand the key differences between these two investments.

1. Rate of return

Historically, gold has given higher returns than Fixed Deposits. In the last 20 years, gold has generated a return of 11.2% every year. If you check the current rates on Fixed Deposit, they would be between 5% and 8% per year.

2. Involvement of risks

When you compare two investments, you shouldn't just focus on the rate of return. You should give equal importance to the risks involved. Though gold has generated higher returns in the past, it is a riskier investment. Gold prices fluctuate and change rapidly. But fixed deposits provide a guaranteed return periodically.

3. Liquidity

Liquidity refers to how quickly you can sell an investment and receive money for it. You can quickly encash your Fixed Deposits through your bank, even before they mature. You will receive the majority of your money back with proportionate interest; only a penalty will be imposed for an early withdrawal. However, selling gold for cash might be difficult. The amount of money you receive depends on the current market rate, and it is difficult to find a buyer at an acceptable price. However, you can increase the liquidity of your gold investments by investing in gold bonds.

4. Tenure flexibility

Banks and financial institutions offer Fixed Deposits for a variety of tenures. For example, Axis Bank Fixed Deposits have tenures ranging from 7 days to 10 years. Deposits with a shorter duration will have a lower interest rate, and those with a longer duration will have higher rates.

If you purchase physical gold, you can decide the tenure for yourself. Gold-linked investments like gold bonds, gold equities, and gold ETFs will have their own tenures. For example, a Sovereign Gold Bond issued by the RBI has a tenure of 8 years, with early encashment allowed after 5 years.

5. Income tax

The income you get from your gold investment is like capital appreciation. The value of the gold you have increases over time, and you sell it after a period for profit.

This profit is taxed under the heading 'Capital Gains'. The tax rate for long-term gains is fixed at 20%. But if you have a short-term gain, you will pay tax as per your regular income tax slab rates.

You earn interest on your Fixed Deposits every year. You must pay tax on that interest annually in line with your slab rates.

6. Income generation

A Fixed Deposit generates regular and fixed interest for you periodically. But gold does not provide a consistent stream of money for you. If you buy physical gold, you store it for a long period and sell it when its value rises. But the question is, "FD or gold bond — which is better for generating regular income?" Both can generate a regular income. If you invest in gold bonds, you will also receive interest twice a year.

7. Loan against FD

If you invest in a Fixed Deposit, you can get a loan against it from your bank or financial institution. You can use this option for your cash requirements instead of liquidating your fixed deposits. This way, you avoid paying a penalty for liquidating your deposits early, and you don't lose interest on the FD. Axis Bank provides a Loan Against Fixed Deposit for up to 85% of your deposit value. The minimum loan amount is ₹25,000.

Also Read: Understanding callable and non-callable FDs

Gold vs. Fixed Deposit: Which investment is better?

You can choose gold or Fixed Deposit after considering your expected return and risk appetite. A fixed deposit is a safe, highly liquid investment with a flexible term. Gold is a riskier investment, but it has offered higher returns than FDs in the past.

To make an informed decision, review our quick summary of FD vs. gold.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.