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Gold Vs Fd - What To Choose?

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Published Date: 28 May 2024Updated Date: 17 Jan 20256 mins readBy MOFSL
Gold vs FD

Introduction

Gold and fixed deposits (FDs) are two popular low-risk investment options available to investors with a low-risk appetite. That said, most investors often find themselves in a dilemma as to which one to opt for as their go-to investment. While both can fit into your investment portfolio, here are certain things to consider before choosing either.

Factors to consider before opting for gold or FD

Some of the critical factors you need to consider before choosing either of them are:

  • Returns

While gold and FDs offer relatively good returns, gold’s return fluctuates with time. On the other hand, FDs offer you a fixed return throughout the investment tenure. Returns from gold are dependent on domestic and international factors. Investors investing in gold have enjoyed double-digit returns in the past. 

On the other hand, returns from FDs have come down with time. However, some special FDs offer slightly higher returns than normal FDs. Senior citizens generally get marginally more returns on their FD investments than those below 60.

  • Investment horizon

Investment horizon refers to the time until which you wish to remain invested. You can opt for gold if you have a long-term investment outlook, say over 5 to 10 years. Gold prices generally appreciate with time. On the other hand, if your investment outlook is for a year or so, FDs are a better choice. 

In other words, if you have long-term goals to accomplish, gold is a better investment. For addressing short-term needs, you can bank on FDs. 

  • Inflation hedge

Historically, gold is considered one of the best financial instruments to hedge against inflation. Appreciation of gold prices helps you mitigate the risks of inflation to a great extent. During periods of economic turmoil and geopolitical uncertainties, gold can safeguard your portfolio from taking a dip. 

However, it’s not often the case with FDs. FDs may not be able to provide you with returns that can outpace inflation. During periods of high inflation, the real rate of returns from FDs is in the negative territory. Real returns are returns you earn up and above inflation. 

  • Liquidity 

Gold and FDs are highly liquid assets. You can easily encash them whenever needed. However, if you liquidate an FD before its tenure, you need to pay a penalty. On the other hand, if you liquidate physical gold, you will not be paid the making charges. 

In this regard, digital gold, such as gold mutual funds and gold ETFs, is a better option. Not only are they devoid of storage and purity issues, but they also ensure you get value for money. 

  • Income supplement

FDs are a better choice if you want to supplement your income. Through FDs, you can get regular payouts as interest that can help you build an alternate source of income. Fundamentally, gold is a wealth-creation asset that helps you hedge against inflation and provides stability to your portfolio during difficult times. It enables you to preserve your purchasing power during inflationary times.

  • Tax treatment

FDs and gold differ in their tax treatment. Income received from FDs falls under income from other sources and is taxed as per your tax slab. On the other hand, profits from physical gold and gold ETFs purchased till 31st March 2023 fall under the category of capital gains. 

They become long-term capital assets when held for three years or more, and if sold, the gains are considered LTCG (long-term capital gains) where you can benefit from indexation. Indexation adjusts the buying price as per inflation and reduces the tax outgo. Also, note that, unlike FDs, which are taxed on an accrual basis, gold ETFs are taxed only upon redemption. 

Wrapping it up

Both gold and FD are prudent investment options if you are looking for low-risk investment options. While gold prices fluctuate with time, they generally go north in the long run. On the other hand, FDs offer assured returns and are latent to market volatility. The right mix of gold and FDs in your investment portfolio can help you maximise gains in the long run and protect against the vagaries of the stock market. However, investing in the stock market allows you to multiply your wealth quickly. With Motilal Oswal, you can invest in appropriate instruments and seamlessly build your dream investment portfolio.

 

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