Gold vs Fixed Deposits: Where Should You Invest In 2021?
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Investment
oi-Sunil Fernandes
What are the options that immediately strike your mind when you think about the safe instruments in terms of savings and yielding better returns? Generally speaking, gold and real estate are two of the most preferred options. Investment in property is a proper goal-based investment and requires a lot of planning and research but gold is something that every Indian wants to make a part of his or her investment portfolio. Especially for ladies, gold is always one of the top choices for investment.
It goes without saying that gold has a significant role in Indian celebrations, especially in marriages wherein gold keeps weightage of at least 20-40% of the entire budget. And, that’s what makes India the 2nd largest consumer of gold across the globe.
As far reaping profits are concerned, gold gave a return of almost 28% in the year 2020 on Year-On-Year basis, beating all odds of Covid-19 pandemic, whereas Sensex witnessed a growth of 16% and FD returns stood at almost 6%.
Due to Covid-19 pandemic, most of the economies across the world were hit badly. Further, the uncertainty on economic recovery drove investors to move towards safe havens of investments, which supported gold prices additionally. Moreover, the production cost of gold at international level has witnessed a jump amid Covid-19 spread, which eventually gave a boost to gold prices.
Now, we are in the year 2021, and pretty well optimistic on gold because of multiple domestic and international reasons. If we pay attention to global economic scenarios, in its first press conference of 2021, the US Fed has predicted slower growth this year. Fed has kept its asset purchase budget intact at $120 billion per month. Fed chairman Jerome Powell agreed that road to recovery will be much slower and longer than what it was originally estimated by top economists. Powell made it clear that the Fed intends to maintain its current monetary policy of low-interest rates, a massive accumulation of treasuries and mortgage-backed securities.
Interestingly, the Fed has kept interest rates at near to 0 and has promised to keep it unchanged for at least 3 more years, which makes the opportunity cost of gold 0 for US investors. US government has authorised stimulus package of $900 billion, which is creating excess liquidity in the market and leading to higher inflation which will be supportive of gold prices.
Now, taking Indian scenarios into account is also important because India is the second-largest importer of gold. Last year, we witnessed a downfall in gold import because marriages and other celebratory functions were postponed due to government guidelines on lockdown in the view of COVID-19 pandemic.
Keeping the current Covid-19 situation in mind (when the vaccine has been given approval), celebratory functions which were postponed last year are most likely going to happen this year and this will create a huge demand for gold in India.
Secondly, Covid-19 has given a boost to usage of digital payments apps like Paytm, PhonePe and others. And, now most of the people in India are familiar with these digital payment apps. Noteworthy, these apps are offering a hassle-free mode of gold purchase and accumulation, which is now attracting a number of digital investors.
Further, the sovereign gold bond has also got acceptance and becoming part of the portfolio of many long term investors. Now, if we compare gold with FD, risk-taking appetite of investor should always be considered and taken into account. Gold has given almost 100% absolute returns in the last 10 years, 15% in the last 5 years, 20% in the past 3 years and 28% in the year 2020 despite Covid-19 pandemic.
Gold return in the last 10 years
| Year | Gold Return |
| 2020 | 28% |
| 2019 | 24.1% |
| 2018 | 7.5% |
| 2017 | 5.2% |
| 2016 | 11.5% |
| 2015 | -6.2% |
| 2014 | -8.2% |
| 2013 | -4.9% |
| 2012 | 12.1% |
| 2011 | 31.7% |
FD interest rate is almost 5-6% in almost all the leading banks in India, and 7% in some of the comparatively smaller banks, which is just above the inflation rate, which was 4.95% in 2020, and 3.75% currently in 2021, and much lower than gold returns of the past 10 years. Also, as the government is enhancing liquidity through stimulus packages, we expected a higher inflation rate in 2021. So, for long term investment, one should go for gold investment which always gives security against inflation in long term.
Further, I think Sovereign Gold Bonds are the best investment tool for investing in gold.
1. It gives you a fixed return of 2.5%* on yearly basis, irrespective of gold actual performance.
2. Sovereign gold bond is issued in accordance with the Government Security Act of 2006 by the Reserve Bank of India, on behalf of the central government. Such immense government backing makes sovereign gold bonds one of the safest forms of investments available in India. Whereas FDs are backed by banks only.
3. The sovereign gold bond can be traded in the secondary market. It means you can exit at any point of time without any penalty. On the other hand, if you break your FD or want money in between, you have to compromise the returns.
4. The capital gains tax arising on the redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.
*These interest rate is notified by RBI at the time of the release of bonds, and it may vary in future
Overall, we can say, as we have seen in the past that the performance of gold is very good as compared to FD, hence, we expect the same in future as well. Due to high liquidity and expectations of higher inflation, gold will continue to give good returns as compared to FD due to low-interest rates.
Authored by – Mr. Ravi Singhal, Vice Chairman, GCL Securities Limited
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