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Sovereign Gold Bond vs Gold ETF: Where should you Invest


Physical gold in Indian families forms a part of rituals and have personal feeling attached to it. Gold is purchased especially during the festivals like Akshaya Tritiya and Diwali as a part of a followed ritual in the country. Earlier it was physical gold the first choice of every investor but the constantly increasing price have forced government and investors look for alternate to physical form of gold – investing in the paper form for gold. The two popular options today prevailing in the market are – Sovereign Gold Bonds (SGBs) and Gold Exchange Traded Funds (ETFs).

Both the options Sovereign Gold Bonds and Gold Exchange Traded Funds have their own importance. They are considered great investment options. If you are wondering and unable to decide whether which one to choose, it is better you learn about its pros and cons. A better understanding of the key differences gold sovereign bond vs gold ETF will help you expand your knowledge and take the right decision.

The diversification in your portfolio is necessary. Investment in sovereign gold bond scheme or gold ETF can help you in diversifying your portfolio. It can help you make a proper balance between risk and rewards. Investment is a big and responsible decision. Hence, one should not take any decision related to investing in haste.

Is Gold ETF and sovereign gold Bond same?

No, Gold ETF and sovereign gold Bond are not the same. Gold ETFs are units that represent physical gold in a demat or a paper form. Investors just like stocks can trade in Gold ETFs using a demat account.

The Reserve bank of India in the country issues Sovereign Gold Bonds on behalf of the government of India. These are considered a good substitute of physical gold that are denominated in grams of gold.

Investing in Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds (SGBs) is a very good alternate option launched in November 2015 by the Reserve Bank of India in agreement with the Government of India. Today it has become popular also in the retail segment. The minimum investment allowed in SGB is 1 gram of gold and thereafter its multiples. It assures you the fixed annual return of 2.5% which is disbursed half-yearly.

If you wish to make investment in Sovereign Gold Bonds (SGBs), you can buy it from authorised private sector and foreign banks, nationalised banks, selected post offices & of course Stock Holding Corporation of India Ltd. (SHCIL). Also, you can buy SGBs from the designated stock exchanges directly or through authorised brokers. You can also take the advantage of weekly windows working many times in a financial year.

Advantages of Investing in Sovereign Gold Bonds (SGBs)

Given below are a few Advantages of Investing in Sovereign Gold Bonds (SGBs):

  • SGBs are considered a secure choice for investment. It is one of the best options for people with low-risk appetite.
  • It is the right choice for you if you are planning investment for a tenure of 8 years with a minimum of 5 years locking period.
  • RBI issues Sovereign Gold Bonds (SGBs) in tranches in a financial year i.e., through multiple weekly windows.
  • The investment in SGBs can be made by individuals, Trusts, Hindu Undivided Families, charitable institutions, universities, and others. Nomination is allowed in it. You can go for both single holding & joint holding.
  • Your decision of investing in the bonds will help you earn a fixed interest of 2.5 percent yearly. You get the last interest income paid at the end of 8 years from the date of bond issue along with the maturity amount.
  • The yield on the SGB is tax-free for you if you hold it until maturity.
  • There is no TDS in it but the earned interest income from the bonds is taxable under the provisions of the Income Tax Act of 1961.
  • You can use your Sovereign Gold Bonds as collateral to raise loans.

Disadvantages of investing in SGB:

  • There is a limitation to the amount you can invest in it. You are allowed to invest maximum amount equivalent to 4 kgs of gold.
  • You do not enjoy liquidity unlike corporate bonds as SGBs have a lock-in period of for 5 years counted from date of bond issue. You can go for the trading in the secondary market only after the completion of 5 years.
  • You may be required to incur marginal loss in the actual received gold price in comparison to the prevailing gold price on the date of redemption. (Redemption price of SGBs at maturity is calculated using the simple average of 999 purity of gold of the closing price of the last 3 business days prior to redemption)
About the Investment Option – Gold Exchange Traded Funds (ETFs)

Gold Exchange Traded Funds (ETFs) is the other alternate to physical gold. It is the paper gold available for investment. Listed and traded on exchanges, ETFs are a type of mutual fund. 1 unit of Gold ETF comprises of 1/2 gram of 24 carat gold and can be traded at the ongoing physical gold market price. Investors thus can trade their gold ETFs holdings on either of the exchanges at a price close to the original price of physical gold. Each single ETF is secured and completely protected in secured vaults as 24ct gold is the underlying asset.

Gold ETFs thus refer to the physical gold but in electronic or dematerialised form. Unlike stocks you can trade in ETFs using your dedicated demat account or through a registered broker. Investors upon selling ETFs get the payment in cash since ETFs are settled in cash and not in the form of physical gold.

Advantage of investing in Exchange Traded Funds (ETFs)

  • ETF pricing is relatively transparent and close to the actual market price of gold, compared to its physical forms as it is free from any premium arising out of the gold purity, making changes, etc.
  • In comparison to SGBs, Gold ETFs are more liquid. Gold ETFs can be traded in the free will of the investors in the open market because it does not have any lock-in period.
  • Gold ETFs can be used as per your investment need – for the short term, mid-term, or long-term investment objectives as desired.
  • Investors incase of Gold ETFs can remain invested for as long as they feel like because Gold ETFs are generally known to be open-ended mutual fund schemes. You can also enjoy returns generated from the fluctuations on 24 carat gold prices.
  • The investment in Gold ETFs is more rewarding. You can consider investing in Gold ETFs in the form of systematic investment plan (SIP) mode.
  • Gold ETFs can be useful incase you plan to raise loans as it can be used also as collaterals for loans.

Best Gold ETF in India 2022

Bottom Note

Investing in Sovereign Gold Bond (SGB) do not require you to have experience or in-depth knowledge but investing in ETF demands an investor to have basic knowledge of trading. It will help you enjoy hassle free trading and maximize your gain on your investment in ETFs. For example, ETFs sometime trade at a high premium particularly during certain volatile days and some time at a low premium. Your experience in trade will help you take the benefit of volatility in the market. Instead of limit order on volatile days, if you place a market order during those days, then you may end up buying it at a higher price. You need to keep your eye open and take wise decision to avoid disappointment.

A Sovereign Gold Bond (SGB) provide you the benefit of certain tax and a fixed interest income. You need to park your money for a period of 8 years with a locking period of 5 years. The liquidity in the bond is limited and thus your money is locked for the declared time. You can buy or sell in the secondary market after the lock-in period only. Gold ETFs on the other hand is preferred for its liquidity feature. It allows investors to purchase gold in small quantity. It features easy liquidity and exit option. They include certain essential expenses and the basic understanding of trading. Your understanding on how to invest in gold ETF can ease your efforts.

Also, remember that the investment instrument you choose meet your investment needs that include long term goals like education, buying a house, marriage, retirement, or wealth creation or short-term financial goals. The objective plays a vital role and thus it will help you take right decision whether to invest in Sovereign Gold Bonds (SGBs) or Gold ETFs.