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

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. While there are many investment options available, the two most popular and reliable options are fixed deposits (FDs) and gold. Both have their own advantages and disadvantages.

While fixed deposits 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 the most profits and better suit your financial goals? Here, understand the various aspects of gold and FDs and decide for yourself which option is best for you!

Fixed Deposits (FDs): 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 tenure.
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 there may be some penalty. You can also take a loan against the FD.
Varying tenures: You can make FDs for tenures ranging from 7 days to 10 years, depending on your needs.
Proof of income: The interest earned on FDs is part of your regular income, which needs to 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: FD returns are often lower than the inflation rate, meaning your money's purchasing power may diminish 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 annual interest rates ranging from 6% to 7.5% on FDs with 1- to 5-year maturity periods. Senior citizens receive 0.50% more interest.

Gold: Luster, Culture, and Inflation Protection

Gold holds great significance in Indian culture. It is considered auspicious and is widely purchased during occasions like weddings. However, gold's importance extends beyond traditional values, as well as being 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, causing gold prices to rise. 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.

Disadvantages 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: Storing physical gold at home poses the risk of theft. Storing it in a locker incurs costs. Purity is also a concern.
No income: Unlike fixed deposits, gold doesn't provide regular income (except for SGB). You benefit only when you sell it at an increased price.
Tax: If you make a profit from selling physical gold, it is subject to capital gains tax. Selling before three years results in short-term capital gains (as per your tax slab), and selling after three years results in long-term capital gains (20% tax with indexation benefits).

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 is 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 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 an FD and 4 lakh rupees in gold can be a safe strategy.

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