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Gold ETF Vs. FD: Which One Is The Best Investment Option?

  • Highlights

  • Gold ETF prices linked to stock market movements and hence unpredictable

  • Returns on Gold ETFs for the last five years in the range of 5.37% to 5.51%

  • Company FDs like Bajaj Finance FD offering 8.35% for 5-year investment

  • FD provides stable and high returns as compared to Gold ETFs

Gold ETFs and fixed deposits. are popular investment options that suit investors with varying requirements. Investing in a gold ETF means purchasing gold in an electronic format. Fixed deposits, on the other hand, involve depositing a sum of money in an account and gaining rates of interest over that amount.

Bajaj Finserv Fixed Deposit

If you are an investor with a healthy risk appetite, you could be comfortable investing in a gold ETF, as these investments are under the influence of fluctuating market forces of supply and demand. If, however, you are risk-averse investor seeking a form of investment, fixed deposits could be a better option for you.

Additional Read: Best Investment Plan for 3 years

Attributes and advantages of investments in Gold ETF

1) Involves investing money in the electronic form of gold. This means purchasing a certain quantity of gold online and reselling it according to your preference.
2) It is a highly flexible option. You have full freedom to choose the amount of money you wish to invest and even the freedom to choose the tenor.
3) It has an advantage over inflation as gold prices are constantly increasing.

4) May be slightly risky as prices for gold are under the direct control of volatile market forces like supply and demand. However, gold ETFs are less risky when compared to trading actual gold.
5) The rising demand for gold worldwide can counter the point made above and provide some safety to the investment.
6) May or may not provide periodic returns. This would be entirely up to you, when you choose to sell.
7) Requires investor to have immense instinct and experience of the market makers and the market forces.
8) Returns from these dealings may be heavily taxed, depending on your profits, income, and returns.

Attributes and advantages of fixed deposit investments

1) This option involves investing a sum of money in an account to gain interest over a tenor. It is a highly flexible option. You have full freedom to choose the amount of money you wish to invest and even the freedom to choose the tenor.
2) An FD may or may not be flexible, depending on your lender. In this option, you have the choice as to whether you want periodical returns, or cumulative returns at the end of the tenor. You can also opt for a functional FD calculator by Bajaj Finance that helps you compute your interest gains.
3) This option has many subcategories that you can review and choose from. The various categories of FDs are recurring FDs, cumulative FDs, non-cumulative FDs, and non-recurring FDs.
4) Investors who seek to gain tax-free returns can always explore the option of tax-saving FDs.
5) A fixed deposit is usually liquid and can be prematurely withdrawn. However, much would depend on the terms and conditions of the institution where you have opened a fixed deposit account.
6) This option is extremely low risk. It is doesn’t have any influence of market forces.
7) This option provides you steady income over a period of time.
8) Bajaj Finance enables you to choose your own tenor and enjoy higher interest rates

Fixed Deposit - Features and Benefits

Drawback of Gold ETFs

Gold Prices are governed by supply and demand of gold products like jewellery and financial instruments like ETFs. The demand in gold usually increases due to the onset of uncertainty in stock markets. Thus, gold prices are subject to large spikes in downward economic cycles. However, this makes the gold market prone only to cyclical gains – gains which happen every few years, and there is no steady increase in prices. Thus, gold and gold-related instruments are heavily dependent on demand and supply. This brings large uncertainty to its returns, which makes it difficult to predict any returns and cannot be tied to any financial goals.

Financial planners recommend gold to be only 5 to 10% of your entire portfolio. Excessive investment in gold can block your money in a slow investment which does not move, thus wasting that part of your capital.

Gold ETFs Vs. Fixed Deposits: A Comparative Analysis

Below is a comparative analysis of both the investment options:

Gold ETFs Fixed Deposits
You can invest in electronic form through a Demat account. You can invest in an online or offline format.
These are open-ended mutual funds from which you can exit anytime without penalties. You cannot exit without penalty – also called as premature withdrawal fees.
The rate is determined by the prevailing market price. The interest prevalent at the beginning of the deposit itself is used and stays the same throughout the tenor of the FD.
There is no tenor – you can stay invested for any duration as you find profitable. FDs can be chosen per different tenors when you need you will need money after a particular duration.
The returns are unpredictable and can go up or down on market cues. It is difficult to know what you will earn. The returns are determined – you know your exact return before you create the deposit.
You can keep adding units of Gold ETFs periodically. You cannot add “units” but you can invest in more fixed deposits at regular intervals – also called as Laddering.
You can create an SIP to purchase a fixed number of units or invest a fixed amount each month. You can create a recurring deposit to invest a fixed amount each month a pre-determined tenor.
If you stay invested more than 1 year in gold ETFs, you are eligible for long-term capital gain tax, which is 20% of the gains in a particular year. Unless you invest in tax saving fixed deposit of 5 years with banks, you are only eligible for tax exemption on TDS up to Rs. 40,000 for a regular citizen or Rs. 50,000 for senior citizen. In the case of company fixed deposits, this limit is only up to Rs. 5,000 in a financial year.
All types of investors gain the same percentage returns for a particular duration of time. Senior citizens and existing customers can receive a higher rate of return for the same duration of a fixed deposit.

How Bajaj Finance FD Outperforms Gold ETF

Currently, Bajaj Finance FD offers an interest rate of 8.35% for 5-year cumulative fixed deposit. Whereas, the returns on gold ETFs for the last five years as per data from leading financial houses have been within the range of 5.37% to 5.51% for the same period. The main reason is the Total Expense Ratio (TER), which is an important ratio while measuring the performance of mutual funds. These are expenses incurred in the administration and execution of a fund, like buying and selling of gold units in the market and other fees.

On the other hand, Bajaj Finance FD does not levy any fees or expense ratios on the interest earnings. You can know the exact maturity amount in advance using the online FD calculator. Thus, it is easier to plan for your financial goals with high paying fixed deposits like Bajaj Finance FD. Bajaj Finance FD has the highest stability ratings of FAAA by CRISIL and MAAA by ICRA, which makes it one of the safest investment options.

Expected Performance of Gold ETF and Fixed Deposits Based on Current Economic Scenario

Gold investments gain traction when global markets are in a tailspin owing to recessionary indications. While the last year few years were buoyant and gold investments were at its lowest, the increasing cuts on policy rates across the world indicate the need to gain traction. The lowering interest rates mean investments across the world are paying lower than earlier. This forces institutional investors to park their money into gold, which can be seen in the increasing prices of international gold in the commodity exchanges.

This has also led to an increase in prices of gold instruments like gold ETFs. The early investors in gold ETFs will gain higher returns in the future time period until interest rates stabilize and returns improve.

Fixed Deposits offered by banks will be dependent on policy rates announced by central banks hence will offer very high interest rates. However, company fixed deposits will stay higher than bank deposits, irrespective of market dynamics. You can always count on lucrative and stable company FDs like Bajaj Finance FD, which is offering interest rate up to 6.50% on regular FDs and up to 6.75% for Senior Citizen Fixed Deposits.

Additional Read: How to pick the right NBFC for a Fixed Deposit

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