Sovereign Gold Bond vs Fixed Deposit

Sovereign Gold Bonds and Fixed Deposits are popular low-risk investment options. FD has been one of the most stable and safest investment instruments for Indian investors. But SGB has become a competitive option since 2015. The Gold Monetization Scheme was launched by the Central Government to limit the import of gold. Each of these schemes offers varying benefits which makes them both great investment avenues. Let’s look at SGB Vs FD as investment alternatives to meet your financial needs.

What is a Sovereign Gold Bond (SGB)?

A Sovereign Gold Bond (SGB) is a financial instrument issued by the Reserve Bank of India. They are mandated certificates issued on behalf of the Government of India against grams of gold. They allow individuals to invest in gold without holding a physical asset. SGB act as a more secure investment tool than real gold. They involve lesser risk as gold prices are less susceptible to market fluctuations. Prices of SGBs tend to rise significantly over time with the rising popularity and demand for gold. These factors make them a highly prospective investment avenue.

You can buy SGB in denominations of 1 gram, 10 grams, or 100 grams. These bonds are tradable in the secondary market just like any other dematerialized financial product. The Bonds have a maturity period of 8 years and offer an exit option from the 5th year onwards.

Investment in Sovereign Gold Bonds is comparatively flexible and better than real gold. If investors buy a higher denomination of the bonds they can store it in the bank and earn interest on it. But buying smaller denominations and storing them in the bank will incur storage charges. Therefore, it will increase your overall investment cost.

The bonds are issued to investors in tranches in a pre-set time window. Generally, RBI announces in a press release when it is open for subscription. It is a one-week window that opens every 2-3 months. You must accompany your application with your PAN Number issued by the Income Tax Department.

What is a Fixed Deposit?

Fixed Deposits are one of the most popular investment options for investors who prefer low-risk investments because they guarantee returns. They are provided by banks and other financial institutions. These include non-banking financial institutions (NBFCs) and housing finance companies (HFCs). You can deposit a lump sum for a fixed time period with an issuing institution. They offer a fixed rate of interest for the entire duration of your investment. The rate of interest on FDs is much higher in comparison to a regular savings bank account. Interest is usually compounded half-yearly or annually, depending on when you take a fixed deposit. Once the tenure of the deposit is over you can choose to withdraw or reinvest the amount. You can even reinvest the entire maturity proceeds for further capital appreciation. FD can also be redeemed before the maturity date against a penalty.

Difference Between Sovereign Gold Bond and Fixed Deposit

As mentioned above, both options are low risk and offer good returns. But here is a comparison of Sovereign Gold Bond vs Fixed Deposit to help you find which meets your financial requirements better.

Risks Involved

As mentioned earlier, both SGB and FD are low-risk investment options. The unpredictability and volatility associated with the precious metal make it a difficult investment for many investors. The price of gold may be unstable in the short term. But it is bound to increase in the long run. But it is bound to increase in the long run. Sovereign Gold Bonds act as a hedge against inflation and the erosion of major currencies. It’s an instrument that will continue to be worth your investment in the years to come. On the other hand, FDs let you invest without worrying about external factors. FD interest rate remains unaffected by fluctuations in the global economy, interest rates, or currency fluctuations. You can enjoy the same interest rate for the entire tenure of your deposit. To enjoy higher returns it is advisable to choose a longer investment term.

Rate of Return

Gold investments offer a substantial rate of return, with inflation-beating results in the past.

Investors have reported earnings with up to 17.9% CAGR return in the past 5 years. The recent surge in gold prices has helped them earn higher returns. However, fixed deposits provide fixed returns and are not affected by market fluctuations. You earn guaranteed returns on an interest rate set by the bank during the opening of an FD account. Unlike SGB the returns do not vary during your investment term. Senior citizens can avail even higher interest rates. The interest rate for them may be .50% – 0.75% higher than general investors.

Liquidity

Gold is the preferred choice among investors looking for high liquidity. There are a number of ways you can invest your money in gold. One of these includes buying sovereign gold bonds which offer you the ease of liquidity. It is a major benefit as you are not subjected to the potential risks or hassles of storing physical gold.

However, the returns on gold will depend on its global rates and market situations. It is advisable to be aware of the market conditions before buying or selling gold. In the case of fixed deposit plans, liquidity is not so high. It entirely depends on the investment terms of the scheme and the deposit policies of the financial institution.

Most financial institutions levy penal interest if you liquidate your fixed deposit before the maturity date. However, there are companies that offer a penalty-free exit from an FD investment.

Loan Against Investment

You can take out a personal loan for 80% of the value against gold and FD’s. The loan facility is available with most banks, NBFCs, and other financial institutions at competitive interest rates. These interest rates are usually lower than the interest rates levied on personal loans.

During the lockdown in 2020, the value of gold increased drastically. RBI had also increased the permissible LTV (loan to value ratio) to 90%. So if you have an SGB of Rs 1 lakh, it will provide you eligibility for a loan of Rs. 90,000. This amount earlier was Rs. 75,000 only. 

Sovereign Gold Bond vs Fixed Deposit – Which is Better Option?

Both SGB and FD investments are low risks, but they work in different ways. Fixed deposits give you comparatively less return than gold bonds, The good thing about fixed deposits is your money will be safe from market fluctuations. Sovereign Gold Bonds offer higher returns but can be affected by market volatility as well. You must make your decision on what to invest in based on the risk you are willing to take. It is advisable to ensure your investment meets your financial goals.

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