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Gold ETF Vs Sovereign Gold Bond (SGB): Which is better for Investment?
Gold has always been a popular investment option, particularly on auspicious holidays such as Akshaya Tritiya and Diwali, when gold is bought as a ritual in India. Millennials are settling for alternative means of investing in gold - in its paper form - due to the rising price of actual gold. Sovereign Gold Bonds (SGBs) and Gold Exchange Traded Funds (GETFs) are the two best possibilities to invest in gold in paper form. SGB and Gold Exchange Traded Funds, or ETFs, are both inexpensive ways to invest in gold. Investors avoid costs like manufacturing and wastage, storage charges, and receive 999 purity.
What is Sovereign Gold Bond (SGB)?
In the Union Budget 2015-16, the government introduced Sovereign Gold Bonds, or SGB, to reduce the demand for actual gold. This strategy provides a simple and low-cost approach to gain exposure to gold. In 2015, the first tranche was released. The Government of India issues SGBs six to seven times a year through limited-time deals. Each SGB series is normally available for 5 days through commercial banks, stock exchanges, stockbrokers, and specified post office offices. You have the option of applying electronically or in person. In most cases, allotment takes 5 days to finish. Demat or physical certificates can be used to hold the bonds. The minimum investment is one bond, which is equal to one gram of gold, with a maximum investment of four kilograms every fiscal year.
What is Gold ETF?
Gold ETFs, offered by mutual funds, are traded on stock exchanges and require a Demat account. One or half a gram of gold can be represented by one ETF unit. AMCs offer an open-end fund of funds that allow you to invest in gold ETFs without having to open a Demat account, but they come with an additional layer of fees for AMC management, which can eat into your returns. You can buy and sell gold ETFs on the regular stock exchange using your existing trading account. These Gold ETFs, like shares, will be credited or debited to your Demat account, and there are no lock-in conditions. Gold ETFs have a high level of liquidity since they can be traded on the stock exchange at the current price during a trading session. Furthermore, transaction costs (broker fee and government charge) are lower than for real gold. This is where gold ETFs differ from traditional mutual funds. The AUM of a mutual fund scheme increases when you buy units from the AMC, and the AUM of the fund decreases when you redeem units. In the case of an ETF, only ownership is transferred from seller to buyer, and the ETF's AUM remains constant.
Difference Between Gold ETF and Sovereign Gold Bond
| Features | SGB | Gold ETF |
| Lock in | 5 Years | No lock-in |
| Tenor | 8 Years | None |
| Payment | Cash up to 20K after that via cheque, DD. | Digital way |
| Where to buy | Banks, Stock Holdings, Post office, Agents | Through Demat Account |
| Minimum Investment | Rs 4,662 per gram and in multiples | 1 unit or 1 gram |
| Maximum limit | Individual, HUF: 4 Kg each family member | No limit |
...
Features of SGB and Gold ETFs
Liquidity
Every series of SGBs has a fixed maturity date of eight years from the date of issue, and they can be redeemed at the current gold price at that time. After the fifth year, RBI allows early redemption, with the redemption value determined at the average closing prices for the previous three working days.
SGBs are less liquid than gold ETFs. Every one of the 11 gold ETFs currently mentioned was traded while this article was being written.
Taxation
In terms of taxation, SGBs are a preferable option. As a special dispensation, if you buy SGBs and retain them until they mature in 8 years, the proceeds are fully free of capital gains tax. The gains you make if you sell them in the market or after the 5-year lock-in period are taxable as capital gains.
If sovereign gold bonds are held to maturity, no capital gains tax is due, whereas gold ETFs kept for more than three years are subject to capital gains tax.
Features of SGB and Gold ETFs
Risk
The government guarantees sovereign gold bonds, thus there is no possibility of default. The credit risk in the gold ETF is likewise relatively low.
Returns
Aside from the capital appreciation or depreciation) in the price of gold, you get half-yearly interest payment on your SGB holdings. Tranches pay interest on the nominal value of the SGB at a rate of 2.5 percent each year. The only way to profit from gold ETFs is for the price of gold to rise or fall over your holding period.
Expense
While gold ETFs have an annual expense ratio, SGBs have none, allowing you to increase your returns.
The premiums and discounts in market prices against NAV might eat into your returns when buying/selling gold ETFs on the open market. If you acquire SGBs in main offers and hold them until redemption, you'll obtain current gold market values.
Gold ETF Vs SGB: Which is better?
SGBs offer a superior bargain with low fees, superior returns, and favorable tax treatment at maturity if you are accumulating gold for the long term. You can buy SGBs as soon as their principal issues become available. The lack of liquidity in the secondary market makes it difficult for investors unfamiliar with gold prices to select the appropriate SGB series at this time. ETFs are a good option for the short term and if you wish to make monthly installments like a SIP. This makes sense if you use gold as part of your asset allocation strategy.
