Introduction
Investing in gold is an age-old tradition in India. Buying a gold ornament or other physical forms of gold like coins or bullion is a customary way to lock in your funds to appreciate over time. However, investing this way poses challenges like storage costs, retail mark-ups, and risk of impurity and lower resale value. You can invest in a digital form of gold to tackle these issues. The two popular gold investment options in India are Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds. Explore what they mean and which one to invest in through this blog.
Gold ETF vs Sovereign Bonds: What do they mean?
Gold ETF is a type of investment that trades on stock exchanges. These work much like regular stocks but with the gold component. A Gold ETF exclusively invests in gold and gold-related assets. By investing in this type of vehicle, you are essentially buying a small piece of gold without having to manage or store it physically. This basket of securities mimics gold's price moments to let you earn returns depending on its performance in the market.
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Sovereign gold bonds are government-issued bonds linked to the gold's price as per the current market. By investing in SGBs, you are lending money to the government in exchange for interest and the value of gold. The government of India, through the Reserve Bank of India (RBI), has been issuing SGBs since Nov 2015. The return on your investment in SGB is assured through the sovereign guarantee and linked to the price of gold.
Detailed comparison: SGB vs Gold ETFs
SGB and Gold ETFs differ in various aspects. Here are some of the key differences to help you make an informed choice:
· Nature of investment
SGBs are government-backed securities where you invest in gold and get fixed interest with the potential appreciation in gold prices. Gold ETFs, on the other hand, are investment funds traded on stock exchanges. They do not offer any interest but track the market price of gold.
· Liquidity
SGBs have a fixed tenure of eight years. However, early redemption is permissible after the completion of the 5th year. You may trade them in the secondary market, but the liquidity is limited. Gold ETFs, traded in stock exchanges, are highly liquid. You can buy or sell them anytime.
· Returns
The interest of 2.5% is paid semi-annually on SGBs along with any appreciation in the gold prices. The last interest gets deployed with the matured amount at the end of the tenure. With Gold ETFs, the returns are solely based on the change in gold prices. There is no additional or assured interest.
· Safety and risk
As a government-backed instrument, SGBs are extremely safe. They also offer a guaranteed interest component besides hedging against the gold price, which gives you risk-free returns to a certain extent. Gold ETFs are also safe, but they offer returns purely based on market movements.
· Investment term
SGBs have a maturity period of eight years. If you want to redeem them early, you can opt for it after the fifth year. This makes it a long-term investment instrument. With Gold ETFs, there is no fixed tenure. Hence, you can use them to achieve your short and long-term financial goals.
· Taxability
One of the main Sovereign Gold Bond benefits is the tax exemption on capital gains upon redemption during maturity. The interest earned, however, is taxable as your income. With Gold ETFs, short-term capital gains are applicable as per your tax slab. Long-term capital gains are taxable at 20.8% and come with indexation benefits.
· Charges
The only form of charge you incur on SGBs is associated with premature redemption. It is typically equal to the interest accrued over the last six months. When you invest in Gold ETFs, you incur charges like brokerage fees, fund management costs, and sometimes administrative charges.
Which one to choose between Gold ETFs and Sovereign Bonds?
Now that you understand how Gold ETFs and Sovereign Bonds work and their key differences, you can decide on what suits your investment needs best. The best way to choose between the two is to check how the pros of these gold investments complement your objective, budget, market outlook and risk tolerance. Meanwhile, checking how the cons affect your interest will give you a complete picture.
Both of these instruments are the best way to invest in gold. They offer an easy, hassle-free, and convenient mode of managing your gold investments as opposed to owning physical gold. Understanding the technicalities and the considerations you need to make is critical to making the right investment decision. You can always check with the bank or financial institution for more information on Sovereign Bonds. Likewise, fund houses will help you understand the intricacies of Gold ETFs better.
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