Bonds issued by Reserve Bank of India | Returns linked with market price of gold | Additional 2.5% interest p.a. (No TDS applicable) | Bonds tradable on exchange Invest Now

Fixed deposits and Sovereign Gold Bonds are both attractive investment options that carry low risk. FDs have been considered one of the safest investment options in India for a long time. However, since 2015 SGBs have been drawing more and more attention because of the Gold Monetization Scheme by the Indian government. Either investment option has its own advantages and disadvantages. For investors seeking to get the best possible returns, choosing between these investments can be challenging. Read on to know more about the difference between a sovereign gold bond and a fixed deposit, and the nuances of these schemes.

Fixed Deposits

Before weighing sovereign gold bond vs fixed deposit, let us look at fixed deposits independently. Fixed deposits are investment schemes offered by banks and non-banking financial institutions (NBFCs). Here is how they work

  1. Investors deposit a lump sum for a fixed duration of time with the financial institution.

  2. The deposited sum earns interest at a certain rate over the predetermined tenor. This rate of interest tends to be higher than that on a regular savings account.

  3. Interest is compounded on an annual or semi-annual basis. It depends on the time of depositing and tenor.

  4. On completion of the tenor, investors can choose to reinvest or withdraw the total amount.

  5. The maturity proceeds can be reinvested in their entirety for even more appreciation.

  6. The FD can be broken and redeemed prior to the date of maturity, but this incurs a penalty charge.

Sovereign Gold Bonds

Sovereign Gold Bonds or SGBs are a type of financial instrument and are issued by the Reserve Bank of India. SGBs are essentially mandated certificates issued against grams of gold. Here is how they work:

  1. SGBs are taken out on behalf of the government of India, and allow investors to hold investments in gold without involving any physical asset. Hence, they are considered a more secure option than buying or keeping real gold.

  2. SGBs involve comparatively less risk, as gold prices do not fluctuate that much.

  3. SGBs prices rise considerably over time, following demand for gold and popularity trends in the market.

  4. SGBs can be bought in the following denominations: 100 grams, 10 grams and 1 gram.

  5. Sovereign Gold bonds can be traded in the secondary market.

  6. Investors can exit after the 5-year mark, but the maturity period is eight years.

  7. Buying a higher denomination and depositing in the bank will help investors earn interest on it. However, doing the same with smaller denominations is not viable as it can incur high storage charges and increase the overall cost.

  8. SGBs are announced in a press release by the RBI and issued in a predetermined time window of one week, in tranches. The window opens every two to three months.

  9. The application for the SGB must include the investor’s PAN number.

  10. SGBs are a much more flexible investment than real gold, making them a highly lucrative investment.

     

Now let us move on to sovereign gold bond vs fixed deposit, and see how their pros and cons measure up against each other.

Sovereign Gold Bonds

Pros

Cons

  1. Assured interest:
    SGBs have a guaranteed interest rate of 2.5% which is disbursed on a semi-annual basis. This rate is fixed for the entire tenor of 8 years. Hence, not only does the investor get to enjoy the earned interest, but also the market value appreciation over that period of time.

  2. Accessibility: Individuals, trusts, HUFs, universities, charitable institutions are all eligible to buy SGBs. The upper limit for investments in a years is 4kgs for HUFs and individuals, and up to 20 kgs for other institutions and trusts.

  3. Affordability: Since the minimum investment starts at 1 gram, SGBs are a very affordable investment. This has made gold accessible to practically everyone.

  4. Online Discounts:
    When purchased online, SGBs cost lesser than the standard market nominal price as there is a discount of Rs. 50 per gram of gold.

  5. Tax exemptions:
    Capital appreciation on SGBs is subject to tax exemptions. The earned interest is taxable in the investor’s possession. Indexation benefits can be availed upon bond transfer.

  1. Risk of loss :
    A drop in gold market price can lead to a loss for the investors, even though the invested units are still secured. There is no such chance of erosion with FDs.

  2. Redemption difficulties: the investor may suffer a slight loss at the time of redeeming the amount at maturity. This is a consequence of the calculation of gold’s closing price, which requires averaging the price over the three days leading up to the date.

  3. Lock-in period: SGBs have a lock-in period of 5 years. For premature redemption, the bod can be traded in the secondary market after this period has expired.

Fixed Deposits

Pros

Cons

  1. Accessibility: FDs are a type of financial instrument that is accessible across all income groups in India. The minimum deposit amount stands at an affordable Rs.5000 only.

  2. Stability and security: FDs are known for being stable and secure investments.

  3. Assured interest rate: the invested amount earns interest at a fixed rate throughout the tenor.

  4. Periodic payouts: Investors have the option of getting interest payouts at certain intervals during the FD term.

  5. Unaffected by fluctuations: FDs with NBFCs or banks are unaffected by market fluctuations.

  6. Senior citizen benefits: Senior citizens can avail higher rate of interest on their FDs.

  7. Loans: The RBI has permitted loans to be taken out against FDs.

  8. Tax saving: FDs can act as a tax saver under the Income Tax Act section 80.

  1. Interest subject to tax: TDS is applicable to interest earned on FDs. This can be applied at a rate of 20% or 10%, depending on the investor’s tax bracket. TDS can be avoided entirely if they have submitted form 15G or 15H for senior citizens, with their bank.

  2. Independent of Market fluctuations: As FDs are unaffected by any market fluctuations, fixed deposits cannot benefit from capital appreciation in the way SGBs do.

  3. Potentially huge losses: In the event of bankruptcy, even if the investor has invested a sum larger than Rs.5 lakhs, they will only receive a maximum of Rs.5 lakhs from the bank, as per RBI regulations.

Sovereign Gold Bonds or Fixed Deposits: Which is Better?

The Sovereign Gold Bond vs Fixed Deposit debate is a long-standing one. As both options offer great returns and carry relatively low risk, it can be a tough choice to make. Each scheme works differently; FD returns tend to be less than those from SGBs, but they promise greater safety than SGBs. Your decision depends on your risk tolerance and financial goals. Ultimately, the safer option is an FD investment. With assured returns and minimal risk, it is considered a better option for most investors and all banks in India offer FDs.

 

On the Bajaj Markets platform, you can avail of offers like the Bajaj Finance FD and browse other options to find the best fit for you. Remember to assess all your financial needs and dreams carefully to find the right FD for you.

FAQs

An FD is an investment for a specific tenor that earns interest on the deposited amount at a fixed rate. There are a number of FD schemes on offer in the market such as the Bajaj Finance FD.

You can withdraw your FD or reinvest it; both options are available. If you withdraw it before maturity, there is a certain penalty.

SGBs are essentially mandated certificates issued against grams of gold.

  • Risk of loss: A drop in gold market price can lead to a loss for the investors, even though the invested units are still secured. There is no such chance of erosion with FDs.

  • Redemption difficulties: the investor may suffer a slight loss in at the time of redeeming the amount at maturity. This is a consequence of the calculation of gold’s closing price, which requires averaging the price over the three days leading up to the date.

  • Lock-in period: SGBs have a lock-in period of 5 years. For premature redemption, the bond can be traded in the secondary market after this period has expired.

  • Interest subject to tax: TDS is applicable to interest earned on FDs. This can be applied at a rate of 20% or 10%, depending on the investor’s tax bracket. TDS can be avoided entirely if they have submitted form 15G or 15H for senior citizens, with their bank.

  • No profits from Market fluctuations: As FDs are unaffected by any market fluctuations, fixed deposits cannot benefit from capital appreciation in the way SGBs do.

  • Potentially huge losses: In the event of bankruptcy, even if the investor has invested a sum larger than Rs.5 lakhs, they will only receive a maximum of Rs.5 lakhs from the bank, as per RBI regulations.

SGBs and FDs both carry low risk, but the risk is not totally absent. Both can sustain losses in different ways; FDs can sustain losses in case of bankruptcy and SGBs during redemption. SGBs can also sustain losses due to a market price drop for gold, but market fluctuations do not affect FDs.

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