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People who are in their early adulthood would have grown up seeing their parents invest in gold and fixed deposits whenever they thought of saving money for the future to meet various life goals. Naturally, for these young adults of today, similar investments pose an automatic choice post they started their careers in life. The primary objective of investments at this stage of their lives is generally tax savings. In a few years, they look for investment options that they can fall back on in times of need in future. But by then gold prices would have got out of reach for these youngsters with work experience for about 3 to 5 years. This is where fixed deposits can come to their rescue and have been used as the first investment and tax savings tool by many young adults to date.

To ensure that the youngsters and investors, in general, do not miss out on the opportunity to invest in the coveted yellow metal, simply because of its high price; several alternatives to investment in Gold has been introduced in the form of paper gold that has brought investment in gold within reach. These alternatives include Sovereign Gold Bonds, Gold ETFs (Exchange Traded Funds) and Gold Mutual Funds.

However, the most popular risk-free investment tools that have seen a steady increase in demand are the Sovereign Gold Bonds (SGBs) and Fixed Deposits (FDs). Investors have used these tools to suit their varying requirements for years. It is important to understand both these investment tools and their offering before choosing to invest in either of them.

Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds is an alternate investment option for physical gold. They are a government instrument in paper form that tracks gold prices and gives an assured interest rate of 2.5% when the bonds are purchased at the time of issue and held for the full term of 8 years. These bonds are issued periodically in tranches through weekly windows. The 2020-21 Series X tranche is coming up and is from January 11-15, 2021. The date of issuance will be January 19, 2021. The Bonds will be sold through Scheduled Commercial banks (except the SFB or Small Finance Banks as well as Payment Banks), SHCIL or Stock Holding Corporation of India Limited, recognised stock exchanges in India like BSE or Bombay Stock Exchange Limited or NSE, National Stock Exchange of India Limited and designated post offices. The Sovereign Gold Bonds or SGBs would be in denominations of a basic unit of 1 gram with its multiples. 

Pros:

  1. Assured interest:
    The SGBs carry a sovereign guarantee on the assured interest rate of 2.5% (disbursed half-yearly) which remains fixed for the entire 8-year term of the bond. Thus an investor at maturity enjoys an enhanced capital appreciation because of the interest earned as well as the market value appreciation on the value of gold that is quite likely over a period of 8 years.
  2. Anyone can buy SGBs –
    Individuals, HUFs, Trusts, Universities and Charitable Institutions. Maximum investments in a fiscal year allowed are 4 kgs for individuals and HUFs, up to 20kgs for Trust and other similar institutions.
  3. Affordable investment tool:
    SGBs are highly affordable as the minimum that one can invest in is just 1 gram of gold. Thus the prised yellow metal is now within affordable limits with this alternate form of investment in gold.
  4. Discounts online:
    These bonds if purchased online via digital mode will cost lesser than the nominal price as the investor will get a discount of INR 50 per gram that this case.
  5. Tax exemptions:
    Capital appreciations on the bonds are exempted from tax. Interest earned on SGBs is exempt and is taxable in the hands of the investor. The indexation benefits are available to an investor on the transfer of bond.

Cons:

  1. Risk involved:
    If the market price of gold falls, an investor runs the risk of losing capital, though the units of gold invested in remains protected. But there is no chance of capital erosion with Fixed Deposits. 
  2. Redemption blues:
    In SGBs, the process of calculation of the closing price of the gold is such that the investor may incur a marginal loss in the gold price in the bonds at the time of redemption at maturity. It involves averaging of the gold price over the past 3 days prior to redemption. 
  3. Lock-in:
    The bonds have a lock-in for 5 years. An investor who needs premature redemption can trade the bond in the secondary market via a demat account anytime after 5 years.

Fixed Deposits (FDs)

Fixed Deposit is an evergreen investment tool offered by banks and NBFCs (Non-banking Financial Institutions) to individuals. Investors need to put in a lump sum amount of money with the chosen financial institution for a specified period of time per their choice, from the terms offered by the bank/ NBFC. Money is considered to be safe and locked in for the agreed and chosen period. Maturity amount consists of the principal and the interest accrued on the account. If the investor so chooses, he/ she can opt for periodic payouts of the interest amount to his/ her bank account during the tenure of FD to manage month expenses as well. Reinvestment of the entire maturity proceeds is also allowed for further capital appreciation. Interest rates offered for various terms are generally better with NBFCs compared to banks. Premature redemptions allowed but against a penalty, thus not advisable.

Pros:

  1. Fixed Deposit as an investment tool is within reach across income groups in the country with the minimum amount stipulated for a fixed deposit being INR 5000 only.
  2. Fixed Deposit is one of the most stable and safe investment instruments available to investors.
  3. The principal invested is secured in Fixed Deposits and the interest rate is assured throughout the term of the investment. 
  4. In order to meet monthly expenses, an investor can opt for periodic interest payouts during the term of the fixed deposit.
  5. No amount of market fluctuations can affect a Fixed Deposit with a bank or NBFCs.
  6. Senior citizens generally enjoy a higher interest rate in their Fixed Deposits with various financial institutions.
  7. Loans are available against Fixed Deposits as per RBI norms. 
  8. A fixed deposit can also act as a tax savings tool for benefits u/s 80C. For that, the term and a lock-in period of the investment need to be of 5 years.

Cons:

  1. Interest earned on a Fixed Deposit is subject to tax. Tax is deducted at source (TDS) at the rate of 10% or 20% depending on the tax slab if the investor. If the income is below the tax slab of 10%, then one can claim a refund of the TDS deducted. Investors can completely avoid TDS if they submit form 15G (for senior citizens form 15H) with the bank / NBFC.
  2. Investors cannot reap the benefits of market fluctuations in a fixed deposit. Thus the capital invested in a fixed deposit never sees a capital appreciation as is possible by investing in SGBs.
  3. In case the of a rare situation like a bank / NBFC  going bust, the investor is guaranteed of a maximum amount of INR 5Lacs, even if he/ she may have had invested a larger amount with the financial institution. This is as per RBI rules.

Thus whether it is young investors or mature ones, they should consider investing in gold instruments when they are looking for growth and not just income from their investment. Since gold is not productive on its own and its value appreciation depends on extrinsic factors, investors should ideally choose more income-generating instruments like bank deposits among others and keep their investments in gold instruments to less than 10% of their entire portfolios.

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