Gold has long been a core element of Indian investment strategy for centuries. New exotic and refined means of investment in gold and real estate have been provided by modern markets. Thus, shoppers today are normally left with the final purchasing question: Gold ETF or Sovereign Gold Bond (SGB)? Both alternatives utilize the price of gold in your portfolio without the hassle of physical gold that needs to be stored but differ from one another in terms of structure, return, taxation, and liquidity. Understanding these variations will enable you to make a worthwhile decision that is suitable for your objectives.
What are Gold ETFs?
Gold Exchange Traded Funds (ETFs) are units of a mutual fund that are linked to physical gold. One unit of gold ETF typically is equivalent to 1 gram of 99.5% pure gold. The ETF shares will be listed on the stock market, similar to shares, at a price that is equal to gold price in open market. Gold ETF key features:
- Liquidity: You are able to buy/sell on stock markets within trading hours.
- Purity guarantee: Due to the physical gold backing the units and gold being of extremely high purity.
- Minimum investment: As little as 1 unit (1 gram of gold).
- Storage & security: No gold to store physically; all units in a demat account.
What are Sovereign Gold Bonds: (SGBs)?
Sovereign Gold Bonds are government securities sold by the Reserve Bank of India (RBI) on behalf of the Government of India. Every bond is one gram of gold and carries an 8-year maturity, with an option to exit early at the 5-year point. Main characteristics of SGBs:
- Fixed rate of interest: 2.5% per annum, payable half-yearly.
- Minimum size: Minimum subscription limit is 1gm of gold.
- Maximum limit: Maximum limit of subscription shall be of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts.
- Government backed: The SGB will have a sovereign guarantee on interest as well as the principal.
- Tax advantage: No capital gains tax if the investor holds till maturity.
- Tranches issue: SGBs can be bought only during RBI dictated windows or in the secondary market.
Which One Do You Go For?
Choose Gold ETFs if:
- You prefer good liquidity and like to be reactive to short-term moves in the price of gold.
- You are a stock market investor with a demat account.
- You want exposure to gold as a diversification in a portfolio.
Choose SGBs if:
- You are a long-term investor (refer to sweet spot of 5-8 years).
- You want the benefit of extra interest income as well as price appreciation for your gold holdings.
- You are tax-conscious and want to avoid paying capital gains tax when you cash in your SGBs.
Gold ETFs and SGBs represent safe, transparent and digital ways to own gold without having to buy physical gold. Think about whether you prefer Gold ETFs or SGBs based on your investment timeframe, income needs, and liquidity. If you are a trader or short-term investor you would probably prefer a Gold ETF because of the flexibility to buy or sell the ETF easily. If are looking to create long-term wealth, then you would want to hold an SGB because of the higher return with the fixed interest and the tax exemption. The best of both worlds is to hold both in your long-term portfolio to balance liquidity with long-term value growth.
Written by Pranjal Data
