What Is the Difference Between Sovereign Gold Bonds And Gold ETFs?

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oi-Sunil

By Sunil Fernandes

Updated: Wednesday, November 18, 2015, 14:26 [IST]

The government recently launched the Sovereign Gold Bond, which is a way to draw people away from physical gold. This is because physical gold has been a big drag on the forex reserves of the country for some time now.

Many individuals have been asking the difference between the Sovereign Gold Bonds and Gold ETFs. They are remarkably different from each other, though they track gold rates. Here is the basic difference between the two:

1) Interest payment

Sovereign gold bonds, would pay interest on the certificates so issued, while there is no such interest that is payable on Gold ETFs. Sovereign Gold Bonds currently pay an interest of 2.75 per cent per annum.

2) Gold ETFs are traded on the Stock Exchange

Gold ETFs are traded on the stock exchange and are pretty liquid. They can also be bought through the stock exchange.

3) Physical gold exchange for certificate

In the case of Sovereign Gold Bonds, the physical gold is converted to certificates. In The case of Gold ETFs, they merely track the price of gold. You need not convert your physical gold. Gold ETFs are less complicated as compared to Sovereign Gold Bonds as they can be bought and sold easily through the exchanges.

One similarity is that both the instruments will track the physical price of gold, which means on redemption or en cashing the same, you would get the price of gold. Of course, there are ancillary charges that maybe levied and it may not be the exact price of gold.

How the Sovereign gold scheme works?

If an individual needs for example, needs to buy gold for his daughter's wedding say 10 years down the line, he could buy the Sovereign Gold Bond with a 10 year maturity. At the time of his daughter's wedding he would get maturity value of gold and at the same time with an interest of 2.75 per cent

Now, there are two interesting aspects here. One is that the individual would have lost interest if he had invested in physical gold. The other is that he would have to worry about keeping the physical gold safe, through a locker incurring additional expenditures in the process.

The other good thing of the Sovereign Gold Bond, is that it tracks the prices of gold. This gives you the price of gold, which is a good benefit.

Difference between Sovereign Gold Bonds and Gold ETFS

Essentially there is not much difference between Sovereign Gold Bonds and Gold ETFs, as both track prices of gold.However, ETFs would not give you any interest, which is why Sovereign Gold Bonds are a better bet.

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