Gold has always been a chosen form of investment, especially on auspicious occasions like Akshaya Tritiya and Diwali when gold is purchased as a ritual in India. However, with the increasing price of physical gold, people are now resorting to settling for alternate forms of investing in gold – in its paper form. The two closest options to gold in its paper forms are Sovereign Gold Bonds (SGBs) and Gold Exchange Traded Funds (ETFs). In these investment options unlike the yellow metal, an investor will not possess any physical form of gold but will hold it like an investment and will have the option to redeem it as and when you need them. Understand the key differences, pros, and cons of investing between Sovereign Gold Bond vs Gold ETF here.
Investing in Sovereign Gold Bonds (SGBs)
Launched in November 2015, by RBI in consensus with the Government of India, SGBs is an alternate option to invest in gold. The minimum investment permitted in this bond is in 1 gram of gold and its multiples thereafter. The assured rate of interest on the bond is 8% which is disbursed half-yearly. The bonds can be purchased from nationalised banks, selected private sector and foreign banks, selected post offices and Stock Holding Corporation of India Ltd. (SHCIL), and designated stock exchanges either directly or via authorised agents. The SGBs are opened for purchase via weekly windows several times in a financial year.
Pros of investing in SGB:
- SGBs are a safe investment option for someone who is looking for an investment option for a long term of 5 to 8 years. RBI issues these bonds in tranches through multiple weekly windows in a financial year. The last tranche for 2020 was from 9 – 13 November 2020 when the issue price for gold was INR 5177 per gram.
- The assured rate of interest available on the bond is 2.5% disbursed half-yearly. The last interest is paid along with the maturity amount at the end of 8 years from the bond issue date.
- The yield on the SGB is tax-friendly. Capital gains tax is exempted on the redemption amount on the bond. The interest earned on the bond is however taxable in the hands of the investor, though there is no tax deducted at source.
- Anyone can invest in SGBs viz. Individuals, Trusts, HUF, charitable institutions, and universities. Both single holding and joint holding are allowed. Nomination too is possible. This is unlike Gold ETFs where only individuals can invest.
- SGBs can be used as collateral in case anyone wishes to take loans. RBI stipulated ‘loan to value’ ratio for gold loans is applicable here as well.
Cons of investing in SGB:
- The maximum that an individual can invest in SGBs is in 4kgs, unlike Gold ETFs where there is no upper limit to investment.
- The SGBs have a lock-in for 5 years from the bond issue date. Only post that they can be traded in the secondary market as required at the prevailing market value of the SGB. Gold ETFs on the other hand can be traded whenever the investor so desires without lock-in worries.
- The redemption price at maturity is calculated basis the simple average of the closing price of 999 purity of gold of the last 3 business days before redemption. The prices or rates are stipulated by The India Bullion and Jewellers Association Limited. Thus there can be a marginal loss in the actual price of gold received compared to the prevailing price of gold on the redemption date.
Gold Exchange Traded Funds (ETFs) as an investment tool
Another alternative method to invest in paper gold is Gold ETFs or exchange-traded funds. These are kinds of mutual funds that are listed and traded on exchanges viz. BSC and NSC are just like shares. Gold ETFs have gold as their underlying asset. 1/2 gram of 24 ct gold comprises 1 unit of Gold ETF and can be traded at the ongoing market price of gold (in its physical forms). Thus investors can trade their holdings of Gold ETFs on either of the exchanges at a price close to the original price of physical gold devoid of any premium, which otherwise is a fallout of the making changes and/ or purity involved in the purchase. 24ct gold being the underlying asset, each ETF is completely secured and protected in secured vaults.
Pros of investing in ETF:
- Pricing of ETFs is more transparent and close to the actual market price of gold, compared to its physical forms as it is devoid of any premium resulting from the making changes, purity of gold, etc.
- Gold ETFs are more liquid compared to SGBs as they can be traded in the open market at the free will of the investors as it does not have any lock-in period. Thus Gold ETFs can be used for the short term, medium-term, or long term investment objectives as desired.
- Gold ETFs are generally known to be open-ended mutual fund schemes and investors can remain invested for as long as they feel like and enjoy returns generated from the fluctuations on 24ct gold price.
- One can look at investing in Gold ETFs in the form of a systematic investment plan (SIP) mode. Thus the pocket pinch involved in bulk one-time investments is minimised if this option is chosen. The investor just needs to maintain the required balance to ensure auto-debits are seamless every month. This makes investment in Gold ETFs more rewarding.
- Gold ETFs are known to be accepted as collaterals for loans as well, even though they are traded like stocks.
Cons of investing in Gold ETFs:
- Unlike SGBs, there is no fixed interest/ income assured from any ETF as the returns in the latter investment depend on market fluctuations only. Capital erosion cannot be ruled out if the redemption is not timed appropriately.
- Charges involved:
Investments in Gold ETFs come with at 3 charges as below though there are no entry and exit loads as such –
- Fund management charge – 1%
- Brokerage at the time of entry into and exit from the fund
- Administrative charges arising from cash holdings and expenses involved in the fund
- Capital gains from ETFs are taxable. 20.6% of capital gains tax is applicable and is available with indexation benefits. Short term capital gains tax is the applicable basis on the tax slab of the investor.
Most importantly, it is essential to zero down the objective of the investment- whether it is long term or short term, whether it is for education, marriage, retirement, or wealth creation; before making a choice. It is also to be kept in mind that one investment in gold and related instruments should not be more than 5 to 10% of one’s total investment portfolio to ensure the investments are protected from inflation and market vulnerabilities.