Introduction:

Gold has been a coveted asset for centuries, valued for its beauty, rarity, and intrinsic worth. Investors often turn to gold as a safe-haven asset, especially during economic uncertainty. When it comes to investing in gold, various options are available, each with its own set of advantages and disadvantages. Knowing the pros and cons of various gold-based investment avenues may help you make a well-informed decision.

This article compares the three popular forms of gold investments: Exchange-Traded Funds (ETFs), Sovereign Gold Bonds (SGBs), and Physical Gold. Keep reading.

Gold Exchange-Traded Funds (ETFs)

Gold ETFs, or Exchange-Traded Funds, track the domestic gold price and are traded on the stock exchanges. Their values fluctuate according to the changes in the domestic gold price. It is a passive investment vehicle wherein units representing tangible gold exist in either paper or dematerialised form. Each unit of a Gold ETF corresponds to 1 gram of gold and is backed by highly pure physical gold. Gold ETFs offer a blend of stock investment flexibility with the straightforwardness of gold investments.

Advantages of gold ETFs:

• Gold ETFs offer high liquidity as they can be bought and sold on stock exchanges during market hours. You won’t have to go anywhere to buy or sell your gold.

• You can gain exposure to gold investments without buying physical gold. It eliminates the risks associated with the storage and security of physical gold.

• Investing in gold ETFs allows you to diversify your equity portfolio

Disadvantages of gold ETFs:

• Investing in gold ETFs may incur specific management fees, which can eat into your overall returns over time.

• Investors in ETFs are exposed to counterparty risk as they rely on financial institutions to manage the funds.

• ETF returns are subject to capital gains tax upon redemption

• ETFs do not offer any interest income

Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds, or SGBs, are government securities denominated in grams of gold. They can be redeemed in cash upon maturity, usually after eight years from the investment date. The Reserve Bank of India (RBI) issues SGBs occasionally on behalf of the Central Government. As an investor, you can apply for SGBs using your Demat account during issuance. Recently, the RBI announced the issuance of SGB 2023-24 Series III at Rs. 6,149 per gram of gold.

Advantages of SGBs:

• SGBs offer an additional benefit in the form of fixed interest income at a 2.5% per annum rate, making them more attractive than physical gold.

• Being government-backed, SGBs carry lower counterparty risk compared to other investment options.

• SGBs are credited directly to your Demat account. It eliminates the risks and hassles associated with the storage and security of physical gold.

• SGBs have a sovereign guarantee as each unit is backed by 1 gram of gold with the RBI.

• Returns are tax-free if the investments are held until maturity.

Disadvantages of SGBs:

• SGBs typically come with a long maturity period of eight years, restricting liquidity for investors. However, you can trade them anytime on the stock exchanges.

• Investors need the option to possess the gold physically.

• Returns are subject to capital gains tax if you redeem your investments before maturity.

Physical Gold

Physical gold, valued for its tangible and emotional significance, is prominent in Indian culture. Investing in physical gold involves buying gold jewellery, coins, bars, etc. As an investor, you can buy physical gold directly from a jewellery shop or online.

Advantages of physical gold:

• Physical gold provides a tangible asset that investors can hold and store.

• Since physical gold is not dependent on financial institutions, there is no counterparty risk.

• It safeguards against inflation, retaining its value even during economic downturns.

Disadvantages of physical gold

• You get exposed to risks associated with the security and storage of physical gold. You may incur additional costs to ensure the safety of physical gold.

• The price of physical gold exhibits variability across the country and can differ among individual establishments.

• Physical gold does not offer any interest income or sovereign guarantee.

• Associated charges can compromise the returns

The final verdict

Considering the pros and cons of different investment instruments, SGBs are the best option as they offer capital appreciation and interest income. However, the choice may vary from case to case based on an investor’s personal preferences.

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