Imagine your financial journey as a road trip. Sovereign Gold Bonds (SGBs) and Fixed Deposits (FDs) are two different routes you can take, each with its own sights and stops.
SGBs are like a scenic mountain road, offering the potential for higher returns but with some bumps along the way. FDs, on the other hand, are like a smooth highway, providing stability and predictable returns.
Just like choosing a route for a road trip, investors need to consider factors like risk and returns when deciding between SGBs vs FD. By understanding the differences between the two, you can pick the route that best suits your financial goals and navigate your way to success. Let's explore these options to help you reach your goals confidently.
Difference between Sovereign Gold Bonds vs Fixed Deposits
SGBs are government securities denominated in grams of gold. They allow you to invest in gold without physically owning it through a certificate. The RBI releases these bonds on behalf of the Indian government in multiple series throughout each financial year. In a Fixed Deposit, you deposit a chunk of money into your bank account for a set period at a fixed interest rate. When it matures, you get back your original amount plus the interest it earned. Let's compare the differences between SGB and FD to understand them more clearly.
Returns
SGBs offer a fixed interest rate of 2.5% per annum on the bond's value, along with the potential for your investment to grow as gold prices rise. Thus, it provides guaranteed income from interest and a chance to benefit from gold price appreciation. FDs, on the other hand, offer a fixed rate of interest for a specific period of time.
Risks
Since SGBs derive their value from gold prices, the value of these bonds is subject to fluctuations in gold prices driven by various economic factors. However, they are backed by the government, so there's no credit risk or fear of a default. Returns from FDs are predetermined and do not change during the investment period. FDs come with the added security of a Rs 5 lakh insurance cover provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Liquidity
SGBs have a maturity period of 8 years, with an option to exit after 5 years. However, if you want to redeem before maturity, you have the option to sell them in the secondary market. On the other hand, FDs come with maturities ranging from 7 days to 10 years. In case of any emergency need, you can easily withdraw the amount before maturity after paying penalty fees.
Taxation
Capital gains in SGBs are exempt from tax if held till maturity, while the interest earned is taxable. Interest earned on FDs is subject to taxation based on the applicable income tax slabs. However, in the case of tax-saver FDs, you can avail deduction on investments of up to Rs 1.5 lakh from your taxable income. Nevertheless, tax-saver FDs have a mandatory lock-in period of 5 years.
SGB vs Fixed Deposit – Which is the better option?
The decision between FD vs SGB relies on your investment timeframe, financial objectives, and risk tolerance. Investors with a moderate risk tolerance may consider SGBs for their potential for higher returns and tax advantages. However, it's important to note that SGB investments are also affected by fluctuations in gold prices. If you seek guaranteed returns and liquidity benefits, FDs can be a suitable choice. Diversifying your investments between these options can create a well-balanced, multi-asset portfolio, helping you achieve optimal risk-adjusted returns.
Also Read: Top 5 reasons to open a Digital Fixed Deposit
FAQs
Q. How do SGBs and FDs differ in terms of returns?
SGBs offer 2.5% interest every year, and your investment can also increase if gold prices go up. On the other hand, FDs offer a fixed interest rate for a certain time.
Q. What is the liquidity aspect of SGBs and FDs?
FDs come with maturities ranging from 7 days to 10 years. On the other hand, SGBs have a maturity period of 8 years, with an option to exit after 5 years. However, if you want to redeem before maturity, you have the option to sell them in the secondary market.
Q. Are SGBs and FDs equally secured?
SGBs' value fluctuates with gold prices, but they are government-backed, so there is no credit risk. FD returns stay fixed, with added security from a Rs 5 lakh insurance cover by DICGC.
