loader2
Partner With Us NRI

Open Free Trading Account Online with ICICIDIRECT

Incur '0' Brokerage upto ₹500

A Comparison of Sovereign Gold Bonds and Fixed Deposits

10 Mins 19 May 2023 0 COMMENT

Investing is like baking a cake. You need to have the right ingredients to get the perfect outcome. Similarly, choosing the right investment option is crucial to achieving your financial goals. When it comes to low-risk investments, Sovereign Gold Bonds (SGBs) and Fixed Deposits (FDs) are two popular options in India. While FDs have been a go-to investment for a long time, SGBs have gained popularity in recent years. 

Both investment options have their advantages and drawbacks. Thus, it's important to understand how they work and which one is the right fit for you. Let’s take a closer look at Sovereign Gold Bonds and Fixed Deposits to help you understand which asset class would best work for you.

What are Fixed Deposits?

Fixed deposits (FD) are a popular and low-risk investment option offered by banks and financial institutions. In an FD, an individual deposits a certain sum of money for a fixed period of time, which can range from a few months to several years. The interest rate offered by the bank or financial institution is predetermined and remains fixed for the entire tenure of the deposit. This means that the investor is guaranteed a specific return on their investment at the end of the maturity period.

FDs offer a higher interest rate than regular savings accounts, making them an attractive investment option for individuals looking to earn a stable return on their savings. The interest earned on an FD is typically higher than the rate of inflation, ensuring that the investment retains its value over time.

In addition, FDs are a safe investment option as they are insured by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) for up to Rs. 5 lakh per depositor per bank.

What is a Sovereign Gold Bond?

Sovereign Gold Bond (SGB) is a government security denominated in grams of gold. The bond is issued by the Reserve Bank of India on behalf of the government of India. The objective of SGB is to provide a safe, secure, and attractive investment option to people who prefer to invest in gold without actually buying physical gold. 

The bonds are sold in multiples of one gram, and the minimum investment amount is one gram of gold.

SGBs offer several advantages over physical gold or even gold ETFs:

  1. They are a more secure investment option as they are backed by the government of India.
  2. They offer an annual interest rate of 2.50% which is payable semi-annually.
  3. There is no storage or security cost as with physical gold.
  4. The capital gains on redemption of the bonds are tax-free if the bond is held till maturity.

SGBs are tradable on stock exchanges, and the price of the bond reflects the prevailing price of gold. Investors can sell the bonds on the exchange at any time before maturity to realize their gains. Overall, SGBs are an attractive investment option for those who want to invest in gold without the hassle and extra cost of owning physical gold.

Here’s a quick snapshot of key parameters to help you decide between SGBs and FDs

Sovereign Gold Bonds (SGBs) and Fixed Deposits (FDs) are both popular investment options in India, each with their own unique features and benefits.

SGBs are government securities denominated in grams of gold. They are issued by the Reserve Bank of India (RBI) on behalf of the government and are a safe and convenient way to invest in gold. 

Returns

  • The interest rate on SGBs is fixed at the time of issuance and is currently 2.50% per annum. SGBs also offer the benefit of capital appreciation, as their value is linked to the price of gold.
  • FDs, on the other hand, are a traditional investment option offered by banks and other financial institutions. They offer a fixed rate of interest for a specific period of time. The interest rate on FDs is generally higher than on savings accounts and is fixed at the time of deposit.

Maturity

  • SGBs have a maturity period of 8 years, with an option to exit after 5 years, and can be traded on the stock exchanges.
  • FDs are considered to be safe and low-risk investments, usually with a lock-in period ranging from 1 to 10 years.

Risk

  • SGBs are a good option for those looking to invest in gold, as they offer the benefit of capital appreciation along with a fixed interest rate. However, the value of gold can be volatile and may fluctuate depending on global factors such as currency exchange rates and political events. 
  • FDs, on the other hand, are a low-risk investment option that offers a fixed rate of return. They are a good option for those looking to preserve their capital and earn a steady stream of income.

Liquidity

  • SGBs can be traded on the stock exchanges 
  • FDs, on the other hand, have a fixed lock-in period but can be withdrawn at any time after paying a penalty

Conclusion 

Both Sovereign Gold Bonds and Fixed Deposits have their own advantages and disadvantages. Ultimately, the choice between the two will depend on an individual's investment goals, risk appetite, and financial situation.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.