In India, Fixed Deposits (FDs) have long been considered a safe and reliable investment option. For many, it’s the go-to investment for parking savings while earning a fixed interest over a specified period. But with changing economic conditions, rising inflation, and newer investment opportunities like gold and index ETFs, is an FD still the best choice? In this blog, we will compare Fixed Deposits (FDs) with Gold and Index ETFs by looking at past data to understand which one truly benefits investors.
1. Understanding FDs, Gold, and Index ETFs
Before diving into the data, let’s quickly understand what these investment options are:
- Fixed Deposits (FDs): An FD is a financial product offered by banks or NBFCs where you deposit money for a fixed period at a predetermined interest rate. The returns are guaranteed and risk-free, but they are generally lower.
- Gold: Gold is one of India’s favorite investments, both for cultural reasons and as a store of value. People invest in gold in the form of jewelry, coins, bars, or even financial instruments like Sovereign Gold Bonds and Gold ETFs.
- Index ETFs: An Index ETF (Exchange-Traded Fund) is a type of mutual fund that tracks a particular stock index, such as the Nifty 50 or Sensex. Investing in Index ETFs means you are investing in the broader stock market without needing to pick individual stocks.
2. Historical Performance: FD vs Gold vs Index ETFs
Let’s break down the performance of these three options over the past 10 years to see how they compare in terms of returns and other factors.
Fixed Deposits (FDs)
- Average Returns: Over the last decade, FD interest rates in India have typically ranged between 5% and 7% annually. While these returns are guaranteed and risk-free, they often barely outpace inflation.
- Example: If you had invested ₹1 lakh in an FD at 6% interest in 2013, your investment would have grown to around ₹1.79 lakh in 10 years. After considering inflation and taxes, the real return would be much lower.
Gold
- Average Returns: Gold has shown steady growth over the past decade, especially during times of economic uncertainty and inflation. On average, gold has provided a return of about 8-10% annually in the past 10 years.
- Example: If you had invested ₹1 lakh in gold in 2013 (when gold prices were around ₹28,000 per 10 grams), your investment would have grown to approximately ₹2.15 lakh by 2023 (with gold prices crossing ₹60,000 per 10 grams).
Index ETFs
- Average Returns: Index ETFs that track major indices like Nifty 50 or Sensex have delivered strong returns over the long term, averaging around 12-14% per annum over the past decade.
- Example: If you had invested ₹1 lakh in an Index ETF tracking the Nifty 50 in 2013, your investment would now be worth approximately ₹3.1 lakh in 2023, reflecting the strong growth of the stock market over this period.
3. Key Factors to Consider
Risk vs Return
- FDs: FDs are low-risk, but they offer lower returns compared to gold or index ETFs. The safety of your capital is guaranteed, but with inflation hovering around 5-6%, your real returns may be negligible.
- Gold: Gold is considered a relatively safe investment, especially in India. It acts as a hedge against inflation and economic downturns. However, its prices can be volatile in the short term, but over the long run, gold tends to retain and grow in value.
- Index ETFs: Index ETFs come with a higher risk because they are tied to the stock market. However, historically, the stock market has delivered higher returns than both FDs and gold in the long run. Over time, this makes Index ETFs a solid choice for long-term wealth creation.
Liquidity
- FDs: FDs are fairly liquid, but breaking an FD before its maturity may result in a penalty or loss of interest income.
- Gold: Physical gold can be easily sold in India, but the resale price can depend on market conditions and purity. Gold ETFs or Sovereign Gold Bonds offer better liquidity without the need for physical storage.
- Index ETFs: Index ETFs are highly liquid as they are traded on the stock exchange. You can buy or sell them at any time during market hours at the current market price.
Taxation
- FDs: The interest earned on FDs is fully taxable according to your income tax slab. This can significantly reduce your real returns, especially if you fall into a higher tax bracket.
- Gold: Long-term capital gains on gold (after 3 years) are taxed at 20% with indexation benefits, which can reduce the overall tax burden. For short-term gains, gold is taxed as per your income tax slab.
- Index ETFs: Long-term capital gains from Index ETFs (held for more than 1 year) are taxed at 10% if your gains exceed ₹1 lakh in a financial year. Short-term gains are taxed at 15%.
4. Inflation Impact
- FDs: One of the biggest downsides of FDs is that their returns may not outpace inflation. With inflation typically around 5-6%, an FD offering 6% interest provides almost no real growth after taxes and inflation.
- Gold: Gold is often seen as a hedge against inflation. In periods of high inflation, gold prices tend to rise, preserving your purchasing power.
- Index ETFs: Over the long term, the stock market tends to outperform inflation. Index ETFs, therefore, offer the best chance to grow your wealth above inflation rates.
5. Which Investment is Best for You?
When FDs Make Sense:
- If you are a conservative investor and prioritize capital protection over high returns, FDs are a safe option. They are ideal for short-term goals or for retirees who need guaranteed income without taking risks.
When Gold is a Good Choice:
- Gold works well as a long-term investment and as a hedge against inflation. If you are looking to preserve wealth during uncertain economic times, gold is a strong option, especially in India where gold also has cultural significance.
When Index ETFs Shine:
- For long-term wealth creation, Index ETFs are the best option. While they carry some market risk, they have historically provided the highest returns over time, making them ideal for younger investors or those with a higher risk tolerance.
Which is More Beneficial?
In conclusion, FDs, Gold, and Index ETFs each have their own benefits depending on your investment goals:
- FDs: Offer safety and guaranteed returns but provide limited growth, especially after accounting for inflation and taxes.
- Gold: A great option for those looking for long-term wealth preservation and protection against inflation. It offers better returns than FDs, but may not match the growth potential of the stock market.
- Index ETFs: Best for long-term investors looking for higher returns and are willing to take some risk. Over the past 10 years, Index ETFs have outperformed both gold and FDs, making them the most beneficial for wealth creation.
Ultimately, the right investment for you depends on your risk tolerance, investment horizon, and financial goals. A balanced portfolio that includes a mix of FDs, gold, and index ETFs might provide the right blend of safety, growth, and protection against inflation.