Sovereign Gold Bonds vs fixed deposit – Which one to opt for?
For investors with an extremely low risk appetite or who are risk averse, fixed deposits and Sovereign Gold Bonds (SGBs) could be better investment options to park their savings, compared to other market-linked instruments. A fixed deposit is a financial instrument that helps an investor grow their savings at a pre-determined, fixed rate of interest for a given period. SGBs are government securities, issued by the Reserve Bank of India (RBI) and are denominated in grams of gold.
Ever wondered how the two investment instruments fare against each other and which one should you opt for?
What are fixed deposits?
Fixed deposits are an investment instrument wherein you deposit a lump sum amount for a specific tenure. A guaranteed interest is paid on your deposit. You can either choose to get the interest income regularly or receive the interest and principal on maturity.
What are Sovereign Gold Bonds?
SGBs are gold-denominated bonds that allow you to buy gold bonds in paper or demat form. The RBI issues SGBs, and they carry a guaranteed interest rate of 2.5% per annum on the initial investment amount. The tenure is eight years, with premature redemption allowed after fifth year. On maturity, you can redeem SGBs at a price that is determined by the simple average closing price of 999 purity gold of the previous three business days from the date of maturity.
SGBs vs fixed deposits – Pros and cons
| Fixed deposits | Sovereign Gold Bonds (SGBs) |
Pros
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Pros
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Cons
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Cons
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Sovereign Gold Bonds vs fixed deposits – Differences
| Parameters | SGBs | Fixed deposits |
| Guarantee | Interest is guaranteed, but the maturity value is not | Both interest and maturity amount are guaranteed |
| Tax benefits | Capital gains on maturity are tax-free. Interest income and gains incurred before maturity are taxable | Deduction allowed for up to Rs. 1.5 lakhs invested in FDs under Section 80C on 5-year deposits. Interest income is tax-free for senior citizens up to Rs. 50,000. |
| Returns | Interest is 2.5% during the tenure. The remaining return depends on gold price movement | Guaranteed returns range between 3% and 8%, depending on the deposit scheme and financial institution |
| Tenure | Eight years. You can, however, opt for an early redemption after fifth year | Seven days to 10 years, varies across financial institutions |
| Issuer | RBI | Banks and NBFCs |
| Minimum and maximum investment | Minimum – Value of 1gm of gold on the investment date
Maximum – Individuals and HUFs – 4 kgs |
Minimum – Rs. 1000, varies across institutions
Maximum – No limit, varies across institutions; some of them have a maximum ceiling |
It is crucial that you understand SGBs and FDs, their pros and cons, and differences before you choose to invest in them. If you are looking for more options that could give you better returns than SGBs and FDs, you can opt for mutual funds or stocks that are in line with your financial objectives.
Selecting stocks or a mutual fund should be done on the basis of your goals – whether short-term or long-term – your age, and appetite for risk. To select an investment avenue that is better aligned with your dreams, it is prudent to explore your options through a financial expert, who can suggest financial plans that are in line with your investor profile.