SGB VS Gold ETF VS Physical Gold: Which Is Better Investment Option?

Demand for buying gold is higher during the festive season, the latest being the celebration of Raksha Bandhan from August 30 to August 31. Investors are usually guided to capitalise on the positive trend in gold. However, there are many types of gold investment available in the country, and gaining popularity. Gone are the days when physical gold was the only option for long-term wealth creation because now there are gold investments in mutual funds and bonds.

On Wednesday, when many regions of India are celebrating Raksha Bandhan, the country's gold price remained unchanged at Rs 54,700 in 22-karat and Rs 59,670 in 24-karat per 10 grams.

22-karat gold in the majority of cities in India is valued in the range of Rs 54,700 to as high as Rs 55,200 per 10 grams. While 24-karat is sold in the range of Rs 59,670 to Rs 60,220 per 10 grams on August 30.

Amidst economic risks, stubbornly high inflation, geopolitical tensions and tight monetary policy, if you're planning to invest in safe-haven assets like gold, check out the key features of physical gold, gold ETFs and sovereign gold bonds.

Gold prices have made a significant jump since last year by nearly 14% in India, and silver prices zoomed by 21% owing to macroeconomic uncertainties like high inflation, recession fears, higher interest rates, and geopolitical tension among others.

1. Physical gold:

As the name suggests, you can touch, feel and see the yellow metal. It's a tangible form of investment, but the most popular and widely spread gold-buying method in India.

Physical gold holds a sentimental value for Indians. From ancient times to modern days, gold is still attractive as they are seen as a long-term store of value. Even though gold is not used as a currency in modern times, it continues to hold a superior role over any currency.

Golds are a sense of physical security and collateral that can be used in emergency cases.

Some of the key benefits of physical golds are that they cannot go bankrupt; has high liquidity; works like a safe haven to hedge returns in high inflation; can protect you from economic crisis like economic crisis; highly effective portfolio diversifier; equipped with low-risk; are long-term wealth creating investment; provides cushion against weakening of currencies; easy accessible; and there is no need to have specialised knowledge for buying physical gold.

In simple words, gold is expected to thrive when everything else is bleak such as economic uncertainties, high inflation, weak currencies, geopolitical tensions, and monetary policy tightening.

However, when there are pros, there are cons too. And physical gold has them as well.

As per Angel One's report, there is always the cost of storing the physical gold (think bank lockers). There can also be associated making charges when in the form of ornaments. Also, there is a high risk of theft. Prices are not standard across the country and also vary among individual establishments. Another risk is the guarantee of purity and being conned.

2. Gold ETFs:

Gold exchange-traded funds (ETF), are a digital form of holding gold, which aims at tracking the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. In simple words, gold ETFs are like purchasing gold in an electronic form.

As per AMFI, Gold ETFs are units representing physical gold which may be in paper or dematerialised form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.

Gold ETFs are traded under the cash segment on both exchanges BSE and NSE, just like every other listed company. Hence, investors can buy and sell Gold ETFs just like any equity shares.

It needs to be noted that when you redeem your gold ETF, you do not get physical gold in return but instead receive the cash equivalent.

AMFI's website highlights that Gold ETFs are ideal for investors who wish to invest in gold but do not want to invest in physical gold due to the storage hassles/doubt about the purity of gold and are also looking to get tax benefits. There is no premium or making charge, so investors stand to save money if their investment is substantial.

Some of the advantages of Gold ETFs are --- transparent and real-time gold prices; tax efficient way to hold gold as the income earned from them is treated as long-term capital gain, no wealth tax; no security transaction tax, no VAT and no sales tax; no fear of theft - Safe and secure as units held in Demat. One also saves on safe deposit locker charges; ETFs are accepted as collateral for loans; no entry and exit load.

However, since gold ETFs are traded just like stocks they are sensitive and will have market-related risks. Hence, the returns under gold ETFs are not fixed and will vary depending on market performance.

3. Sovereign Gold Bond Scheme:

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by the Reserve Bank on behalf of the Government of India.

As per RBI's FAQS, the quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or demat form eliminating the risk of loss of scrip etc.

There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold which he has paid for.

Persons resident in India as defined under the Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities and charitable institutions. Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

Also, notably, interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961). However, the capital gains tax arising on the redemption of SGB to an individual has been exempted. Additionally, TDS does not apply to SGBs.

Last month, in a blog, Venture Securities said, that gold is a pivotal aspect of portfolio diversification and like any other investment instrument must be prudently invested in. However, banking upon its general trend the yellow metal is likely to provide a safe avenue for capital appreciation & Sovereign Gold Bonds might make it an even more attractive option for long-term investors.