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Gold ETF vs SGB vs gold mutual fund: Which gold investment is best in India?

Gold ETF vs SGB vs gold mutual fund: Which gold investment is best in India?

Owing to its high stability and intrinsic value, gold has been a key investment avenue for centuries. Today’s dynamic financial landscape has made it easier for investors to invest in this precious metal without holding it in a physical form.

They can invest in gold through various options such as Sovereign Gold Bonds (SGBs), gold mutual funds, and gold Exchange-Traded Funds (ETFs). While each of these investment vehicles is backed by the security of gold, they differ in terms of operation, liquidity, risk, and potential returns.

In this article, we’ll break down these three gold investment options to help you understand which investment avenue best aligns with your financial goals and strategies.

Sovereign Gold Bonds (SGB)

Introduced by the Reserve Bank of India (RBI) in consensus with the Government of India, SGBs offer a unique way to invest in gold. They are denominated in grams of gold and offer the same benefits as physical gold, with added advantages. SGBs have a fixed tenure, usually eight years, with an option to exit after the fifth year on interest payment dates.

Investors pay the issue price in cash and the bonds are redeemed in cash upon maturity. These bonds pay a fixed interest rate, presently at 2.5% per annum, on the initial amount of investment. They are suitable for investors looking to invest in gold for the long term without physical possession.

Gold mutual funds

Gold Mutual Funds (MFs) are another avenue for investing in gold, allowing investors to gain exposure to the precious metal without directly purchasing it. Gold MFs are open-ended mutual fund schemes that invest in gold bullion and companies involved in gold production, processing, or mining.

These funds pool money from various investors to invest in a diversified portfolio related to gold. They are ideal for investors who want a professionally managed portfolio and are looking for exposure to gold as an asset class. They are also suitable for those who wish to invest in gold without the complexities of handling physical gold, like storage and purity concerns.

Gold Exchange-Traded Funds (ETFs)

Gold ETFs are another popular option to include gold in your investment portfolio. These are open-ended investment funds traded on stock exchanges, just like stocks. Each unit of a gold ETF represents ownership in gold bullion, with the purity and quantity backed by actual gold holdings.

One of the biggest advantages of gold ETFs is their high liquidity. Investors can buy and sell units of gold ETFs on the stock exchange during market hours. This option is suitable for investors looking for a more cost-effective and transparent way to include gold in their portfolio.

SGBs vs gold MFs vs gold ETFs

CriteriaSovereign Gold Bonds (SGBs)Gold mutual fundsGold ETFs
Nature of investmentGovernment securities backed by goldMutual funds investing in gold bullion and related stocks   Exchange-traded funds tracking the price of physical gold
LiquidityModerate (premature redemption is allowed after 5 years)High (can be redeemed on demand)High (traded on stock exchanges)
RiskLowModerateModerate
ReturnFixed interest plus potential capital gains based on gold pricesDepends on gold prices and performance of gold-related stocksBased on the current market price of gold
TaxationExempt from tax if held until maturity;,  As per individual’s slab rate

Gold ETF vs SGB: What’s the difference?

Let’s break down gold ETF vs SGB:

Gold ETFs are listed and traded on stock exchanges like other shares. They invest in physical gold as their underlying asset. They offer high liquidity, no lock-in period, and the flexibility to invest via a Systematic Investment Plan (SIP). However, gold ETFs do not provide any fixed interest, and their returns depend on the prevailing price of gold.

SGBs are bonds denominated in grams of gold. Their returns are linked to the market price of gold at maturity. SGBs offer a fixed interest of 2.5% per annum on the initial investment, along with price appreciation.

Another difference between gold ETFs and sovereign gold bonds is that the former offers better liquidity. Since ETFs are traded directly on stock exchanges, investors can buy or sell them without any lock-in period. On the other hand, SGBs have a long maturity period of eight years, and while they can be traded on the secondary market, liquidity may vary across different tranches.  

Gold ETF vs SGB vs physical gold: Pros & cons table (India)

Gold ETF vs SGB vs physical gold – Here’s a snapshot of the pros and cons:

Investment optionProsCons
Gold ETFEasy to buy and sell online Suitable for a wide range of investors, as even small quantities of around 1 gram can be purchased electronically Highly liquid No lock-in periodReturns depend only on gold price movements No fixed interest
SGBsEasy electronic access Allows investment in small quantities of gold Offers 2.5% annual interest in addition to price appreciationCurrently available only in the secondary market Relatively low liquidity compared to ETFs and, in some cases, even physical gold
Physical goldHighly liquid No lock-in period Widely accepted Easy to sellRisk of theft or storage issues Making charges Purity concerns

Taxation difference: Gold ETF vs SGB in India

Let’s understand the taxation difference: sovereign gold bond vs gold ETF in India:

When it comes to taxation, the difference between gold ETFs and sovereign gold bonds is mainly in terms of capital gains and interest income. For gold ETFs, capital gains are classified based on the holding period. If held for more than 12 months, gains qualify as Long-Term Capital Gains (LTCG) and are taxed at 12.5% without indexation. If sold within 12 months, the gains are treated as Short-Term Capital Gains (STCG) and taxed according to your applicable income tax slab rate.

For SGBs, capital gains from redemption at the end of the eight-year maturity period are fully exempt from tax under Section 47 (viiC) of the Income Tax Act, 1961. However, if sold on the stock exchange within 12 months, the gains are taxed at slab rates. If sold after holding for more than 12 months, LTCG applies at 12.5%. Additionally, the annual 2.5% interest earned on SGBs is taxable under ‘Income from Other Sources’ at applicable slab rates.

Which is better for short-term vs. long-term?

Gold ETF vs SGB vs gold mutual funds – let’s see which of these can be used for your short and long-term needs:

Gold ETFs and mutual funds tend to work better for short-term goals as they are easy to buy or sell whenever you need the money.

For long-term goals, SGBs are often a better fit as they come with an added benefit of 2.5% annual interest. Gold ETFs and mutual funds can also be used for long-term investing, but unlike SGBs, they do not offer any assured interest on top of gold price appreciation.

Who should invest in gold ETFs, SGBs, or gold mutual funds?

Gold ETFs, SGBs, and gold mutual funds are suitable for investors who want exposure to gold without the hassle of owning physical gold. They are ideal for those looking to diversify their investment portfolio by adding gold as an asset class. These options also suit investors seeking a hedge against inflation.

Additionally, investors who want to explore and participate in the gold market without the hassles of storage, additional costs like making charges, and security threats may find these virtual, gold-linked investment options appealing. Gold ETFs, SGBs, and gold mutual funds can also be suitable for investors who prioritize liquidity. These options can be easily bought and sold and can suit different time horizons and financial goals.

Wrapping up

Selecting the best option between SGBs, gold MFs, and gold ETFs depends on your investment objectives, risk tolerance, liquidity requirements, and tax considerations.

To make an informed decision, avail of professional guidance from the experts at Tata Capital Wealth. We’ll evaluate your goals, risk profile, and investment horizon to help you select the best option that aligns with them. Visit Tata Capital website to start investing securely today.

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FAQs

What is the main difference between a gold ETF and a Sovereign Gold Bond (SGB) in India?

Gold ETFs are traded on stock exchanges like shares. They are backed by gold. On the other hand, SGBs are government-issued bonds linked to gold prices and offer additional fixed interest income.

Are gold ETFs or SGBs safer for Indian investors?

Both gold ETFs and SGBs are considered safer than physical gold since there is no risk of theft or storage. However, their returns are market-linked and depend on gold price movements, which adds some risk to your investment.

Which has better returns: Gold ETF or SGB?

Gold ETFs provide returns purely from price appreciation, while SGBs offer gold-linked returns plus an additional fixed interest of 2.5% per annum.

How are gold ETFs and SGBs taxed in India?

Gold ETFs are subject to a 12.5% capital gains tax on long-term holdings of over 12 months and to applicable slab rates on short-term gains. SGB maturity gains are tax-exempt, though interest and sales made in the secondary market are taxable.  

Can I trade SGBs as easily as gold ETFs on the stock exchange?

No. SGBs are traded only in the secondary market and are less liquid than gold ETFs. Currently, no new SGB tranches are open for RBI subscription. While investors can buy SGBs from the secondary market, trading volumes vary across tranches, and some may have limited liquidity.

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