There has been always a healthy debate between gold investors on Sovereign Gold bonds, Gold ETFs, and Gold Funds. Here we will try to simplify the advantages, and disadvantages of the other. Gold is the only form of investment or savings most Indians believe in and run for.
It is better to understand Gold as an investment rather than differentiate between investing in gold vs the stock market. This article will be a pleasing one for physical gold lovers, yet it will be an eye-opener for all gold investors.
The reason why people are attracted to gold as one of the best investment options is, that people think gold prices hike up every day, every month, and every year.
People don’t understand, that the price of gold shrinks and remains flattened for a specific period, movement depends on several factors.
Let us figure out the historical data on Gold price movement
Gold Historical Price:
The above image is a glimpse of the last 10 years of the Gold price movement. This clearly states a hike in gold price happens after 10 years
- Demonstrated the price range of gold from 2010 – 2020 on June 19th. Initially, there was a price hike from Rs.18935 in 2010 to Rs. 30740 in 2012 at a growth of 27.37% per annum.
- From 2012 to 2018 the range started from 30740 to 30960, with a growth of 0.12% per annum. Even in that flat phase, there were fluctuations in price. The price even came down to negative growth in the years 2013, 2014, 2015, and 2017, for four consecutive years.
- 2019 and 2020 to date, the price is in high growth. This is due to the economic slowdown, the world trade war, and the COVID-19 pandemic.
According to financial experts, you should allocate at least 10% of the assets in a portfolio to gold investments. You can invest in gold by buying gold bars, gold coins, sovereign gold bonds, and gold exchange-traded funds (ETFs).
However, due to the rising cost of physical gold, investors are now choosing alternative methods of purchasing gold in paper form. The two most similar alternatives to gold in its paper forms are,
- Sovereign Gold Bonds (SGBs)
- Gold Exchange Traded Funds (ETFs)
- Gold Mutual Funds
Unlike yellow metal, which investors own in physical form, these investments allow gold to be redeemed whenever needed. Are you wondering which one is the better choice in these two? Continue reading.
Sovereign Gold Bonds vs Gold ETF – Comparison:
|Sovereign Gold Bond
|No lock-in period
|Higher than the actual return on gold
|Lower than the actual return on gold
|Capital Gains Tax
|LTCGs are applicable after 3 years. No capital gains tax if held till maturity
|LTCGs are applicable after 3 years
|It can be used as collateral
|It cannot be used as collateral
|Tradability / Exit Route
|Tradable on the stock exchange. Withdrawal from 5th year
|Tradable on the stock exchange
What is Sovereign Gold Bond (SGB)?
Sovereign gold bonds are paper-based or digital gold investments. On behalf of the Indian government, the Reserve Bank of India (RBI) offers Sovereign Gold Bonds. Each bond is equivalent to one gram of 999-purity gold.
These debt securities provide investors with fixed interest rates. Additionally, you can sell it in the secondary market to generate capital gains.
Individuals and Hindu Undivided Family (HUF) can invest a minimum of one gram, and the maximum is four kilograms.
However, the maximum limit for trusts and companies is 20 kg, as announced by the government. You can hold SGBs jointly or individually. For joint applications, the limitation applies to the first applicant.
To apply for SGBs, visit the branches of the following,
- Nationalized banks
- Authorized private and foreign banks
- Authorized stock exchanges
- Authorized post offices
- Stock Holding Corporation of India Ltd. (SHCIL)
Also, you can apply for these bonds online at approved commercial banks’ websites. SGBs are stored in the form of certificates, and you can also dematerialize them. As a result, theft or extra storage fees are not possible.
Benefits of Investing in Sovereign Gold Bond:
The advantages of purchasing SGBs include the following:
SGBs do not involve any added risk connected to holding physical gold, except market risk. The bonds are not subject to significant making, designing, or TDS charges. No one can steal or transfer its ownership.
SGBs have an annual interest rate that is fixed at 2.5%. The interest is paid in two equal annual payments. This could be an extra source of income for investors.
Protection Against Inflation:
The price of gold has historically increased significantly. As a result, investors will profit from increases in the real worth of their investments and build considerable wealth over time.
An investor can quickly and easily apply for SGB online. They can do this by visiting the specified commercial banks’ websites.
For online applications and payments, the nominal value for Gold Bonds is typically Rs. 50 less than the issue price per gram of gold.
Investors are allowed to keep SGBs in a Demat account. This can only happen if investors request it explicitly on the application form.
The bonds will remain in the RBI’s records until the dematerialization procedure is completed. Following the bond’s allotment, there is also the option to convert the holdings to Demat.
Investors who transfer their bond before it matures may gain from indexation. Furthermore, a sovereign guarantee safeguards the redemption of funds and the interest earned.
Easy Stock Exchange Trading:
SGBs owned by individuals can be traded on stock markets. For example, after five years, investors can exchange the bond on the National Stock Exchange or the Bombay Stock Exchange.
Banks accept SGBs as security for loans. They consider them as gold loans after fixing the loan-to-value (LTV) ratio to the value of gold. The India Bullion and Jewelers Association Limited determines the ratio.
Free of Hassle:
You can own gold without any physical assets (No risks and no storage cost).
Simple Exit Option:
The bond has an 8-year term with a 5th-year option to redeem on the interest payment date.
SGB investments are a cost-effective method of purchasing gold. You must use SGB to invest at least one gram of gold.
What is Gold ETF?
Gold ETFs are Exchange-Traded Funds that follow domestic gold prices. These funds are passive investment vehicles that build a basket of gold bullion based on gold prices.
Investors can buy Gold ETFs using a Demat account, just like other Exchange-Traded Funds.
One gram of gold is equal to one unit of the Gold ETF. These ETFs are listed on different stock markets, including the National Stock Exchange and the Bombay Stock Exchange, and they trade similarly to stocks.
Gold ETFs do not provide physical gold to investors but are the only means to profit from the market price difference of physical gold.
At the time of selling, investors who purchase Gold ETFs will receive cash equal to the domestic gold price.
Benefits of Investing in Gold ETF:
Gold ETFs can be purchased, sold, and exchanged in small quantities. It is impossible to buy pure gold in tiny amounts at gold shops, and purchasing a little gold at a store will cost a lot.
The cost-effectiveness of buying gold ETFs is an additional benefit. You can purchase gold ETFs at the market price without paying a premium; there are no making charges associated.
Long-term Holding Convenience:
Unlike physical gold, Gold ETFs (in India) are not subject to wealth taxes. Additionally, there is no storage issue where one needs to be concerned about security, etc.
The units are kept in a Demat account under the owner’s name. This is usually a concern if one keeps large amounts of physical gold in their house or a bank locker.
There is no problem with the availability of Gold Bees (or any other Gold ETF) on the exchange because the exchange is responsible for all the trading.
It is available because the bonds are traded on the stock exchanges, and market makers (authorized participants) are in place to create liquidity.
You don’t have to worry about identifying a shop to sell it, mark-downs, or even testing its purity when selling the bonds.
No possibility of Theft:
No risk of Theft occurs because the Gold ETF units are kept in the holder’s Demat account.
The consistency of purity is one of the key benefits of investing in gold ETFs. Since the price of pure gold guarantees the worth of each unit, there is no risk to purity.
Ease of Trading:
It’s very easy and practical to invest in gold using gold ETFs. Because one unit of gold ETF equals one gram of gold, investors can purchase as many units as they like through a stock broker or an ETF fund manager.
Like the stock exchange, buying and selling gold ETF is always possible.
Purchasing physical gold from a retailer can cost a lot of money. However, because gold ETFs offer such flexibility, investors can buy any quantity of gold they like.
Gold prices are not hidden behind closed doors. They fluctuate greatly, and people can see the changes through various sources. As a result, it is the most transparent method of investment.
Gold is the most desirable asset since it has social and emotional worth. In India, it has been the preferred investment for decades. Gold investment has seen numerous transformations along with the times.
The Indian government has established dematerialized mutual funds and certificates that can be used to hold digital gold.
SGBs and gold ETFs are both excellent investment choices. Depending on your needs, one of the two options may be best for you.
SGB is a fantastic option if you wish to invest in gold for a considerable time because it has an 8-year maturity period. Additionally, investing in SGB will earn you an extra 2.5% P.A. in interest.
Similarly, if you desire an investment choice that you can easily liquidate, gold ETFs will be your best alternative since SGB requires a 5-year waiting period for early withdrawal.