In India, gold isn’t just a valued metal that can act as a hedge against inflation – it is considered an emotional heirloom to pass on to future generations. However, as we live in a digital world, there are ways to invest in gold digitally, increasing convenience and accessibility. Some of these are regulated by government authorities, eliminating concerns around purity, transparency and safe storage.
Two of these include Sovereign Gold Bonds (SGBs) and Gold Exchange-Traded Funds (Gold ETFs), which offer exposure similar to buying physical gold but with some unique advantages.
In this article, we will help you understand these two options by explaining the differences between Sovereign Gold Bonds (SGBs) and Gold Exchange-Traded Funds (Gold ETFs), and which one may be suitable depending on your investment needs.
Understanding Sovereign Gold Bonds
The Reserve Bank of India (RBI) launched Sovereign Gold Bond (SGB) in November 2015 as an alternative to buying physical gold. It allowed investors to buy gold bonds equivalent to a certain amount of gold.
The minimum investment allowed in SGB is 1 gram of gold. Furthermore, the investors earn a fixed interest of 2.5% per annum on their investment. This interest is credited to the investor’s account every 6 months.
An investor can stay invested in SGBs for a maximum tenure of 8 years, with an early exit option available after 5 years. Their redemption is linked to the current market price of gold.
As of now, there are no new Sovereign Gold Bond (SGB) tranches announced or available for subscription through the RBI. The future of the SGB scheme remains uncertain, with no official updates on upcoming issuances.
However, investors looking to invest in SGBs can purchase them through the secondary market. SGBs are listed and traded on stock exchanges and can be bought or sold using a demat account. However, trading volumes typically differ across tranches, with some tranches experiencing lower liquidity. Prices may trade at a premium or discount depending on market demand and the remaining tenure.
Additionally, investors buying from the secondary market will still receive interest payouts based on the bond’s original issue price, not the current market value.
Understanding Gold ETFs
Gold Exchange Traded Funds or Gold ETFs are a type of mutual fund investing in gold. Just like shares of companies, these Gold ETFs are also traded on the stock exchanges like NSE and BSE. They are managed by mutual fund companies, and each unit of a Gold ETF represents a certain quantity of gold.
An investor who is interested in buying Gold ETFs needs a demat account. The value of Gold ETFs changes based on the price of gold in the market.
Sovereign Gold Bonds and Gold ETFs: The differences
Issuer
While Sovereign Gold Bonds are issued by the government through the RBI, Gold ETFs are offered by mutual fund companies, which are regulated by SEBI.
Returns offered
When an investor invests in SGBs, they receive two types of returns – fixed returns (2.5% per annum) and potential capital appreciation based on gold price. On the other hand, Gold ETFs only give potential returns based on gold price movements and no fixed interest.
Liquidity
Since you can sell Gold ETFs anytime on the stock exchange, they offer higher liquidity. SGBs, on the other hand, are less liquid as they come with a lock-in period of 5 years for early exit and 8 years for maturity.
Costs
While Gold ETFs involve fund management fees and brokerage charges, SGBs have no management cost, only the initial buying price.
Risk
Both are subject to market risk and the price at redemption depends on the current market value of gold. So, capital loss is possible. However, in the case of SGBs, the 2.5% annual interest is guaranteed, making it less risky in comparison to ETFs.
Read Also: Gold ETF vs Gold Mutual Fund: Key Differences and Which is Better?
Taxation on Sovereign Gold Bonds vs. Gold ETFs
Sovereign Gold Bonds
If Sovereign Gold Bonds (SGBs) are held for 5 years or until maturity and redeemed through the RBI, there is no tax on capital gains.
But if you sell SGBs before they mature on the secondary market are as follows:
• Selling within 1 year: Profits, if any, are added to your income and taxed as per your income slab.
• Selling after 1 years: Profits count as long-term capital gains and are at 12.5% without indexation benefits.
Taxation on Gold ETFs
As per tax rules effective from April 1, 2023, the capital gains on Gold ETFs are taxed at slab rates, regardless of the holding period.
Sovereign Gold Bonds or Gold ETFs: Which is more suitable?
Sovereign Gold Bonds may be suitable if you are looking for a longer-term investment with additional fixed interest and are comfortable with reduced liquidity. If you are not concerned about short-term access to funds, SGBs may be a suitable choice.
On the other hand, Gold ETFs may be more suitable if you want more flexibility and liquidity or prefer investing small amounts regularly rather than locking up a large capital at once.
Read Also: Gold ETF vs Silver ETF: Key Differences and Where to Invest?
Conclusion
Both Sovereign Gold Bonds and Gold ETFs offer ways to invest in gold digitally, without the concerns of physical storage. While SGBs may suit long-term investors seeking potential stability and fixed interest, Gold ETFs offer more flexibility and easier access, especially for shorter holding periods.
FAQs
What is the minimum investment amount for Sovereign Gold Bonds?
The minimum investment is equivalent to one gram of gold. The price is decided by the RBI at the time of the issue.
Can I sell Sovereign Gold Bonds before eight years?
Yes, you can sell Sovereign Gold Bonds after the fifth year on interest payment dates, if held in certificate or demat form. However, they can be sold any time on the secondary market through a stock exchange (if held in demat form).
Do I need a demat account for Gold ETFs?
Yes, a demat account is necessary for buying and selling Gold ETFs. Without it, you cannot invest in Gold ETFs.
Which option is better for short-term investment?
Gold ETFs may be more suitable for shorter term investment because they can be bought and sold easily on the stock exchanges without any lock-in period. However, gold prices can be volatile in the short term.
Is the interest on Sovereign Gold Bonds taxable?
Yes. The 2.5% annual interest is taxable as per your income slab. Capital gains arising from selling to the RBI at maturity are tax-free. However, if sold on the stock exchange, capital gains tax applies.
What is the disadvantage of Gold ETFs?
One consideration with Gold ETFs is the expense ratio, which can reduce overall returns slightly. Also, there is no fixed interest on Gold ETFs. However, advantages include higher liquidity and the option to top up investments or redeem at any time.
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