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Gold has long been a preferred investment. With rising gold prices and concerns over physical storage, investors increasingly choose digital alternatives. The two popular options are Sovereign Gold Bonds (SGBs) and Gold Exchange Traded Funds (ETFs). These allow you to gain exposure to gold without holding it physically.
Both options present distinct features, benefits, and limitations. SGBs offer fixed interest and tax advantages. Gold ETFs provide greater liquidity and market-linked returns. Understanding the differences between SGB and Gold ETF helps you select the right gold investment option for your portfolio.
Here are the key differences between SGB and Gold ETF to help you determine the best option for your needs:
Returns
SGBs offer two advantages—an annual interest of 2.5% and capital appreciation if gold prices increase. Gold ETFs rise in value only when gold prices go up and do not provide any interest. Therefore, for long-term investments, SGBs generally deliver better returns.
Liquidity
Gold ETFs can be bought and sold anytime on the stock market, providing high flexibility. SGBs have an 8-year tenure and can only be sold after 5 years, making them less flexible when quick access to funds is necessary.
Taxation
Holding SGBs for the full 8-year period exempts you from paying tax on the gains. In contrast, profits from Gold ETFs held for more than 3 years are subject to a 20% tax.
Costs
SGBs incur no extra fees or hidden charges, resulting in lower overall costs. Gold ETFs involve annual management fees and may attract transaction charges during buying or selling.
Suitable Investors
SGBs are ideal for investors seeking long-term holdings with steady returns and tax advantages. Gold ETFs suit those who need ease of trading or plan shorter investment durations.
Below are some key advantages and disadvantages of SGBs:
Pros
Safe for Long-term Investors: SGBs provide a secure option for investment periods of 5 to 8 years. The Reserve Bank of India issues these bonds in periodic batches throughout the year.
Fixed Interest Income: You earn a fixed interest of 2.5% per annum, paid semi-annually. At the end of 8 years, the final interest is calculated on the gold value as well.
Tax Benefits: When you hold your SGBs till maturity, you do not pay tax on profits from gold appreciation. The interest you earn each year is taxable.
Can Be Used for Loans: You can use SGBs as security to get a loan. The loan amount depends on the current gold value, similar to a gold loan.
Cons
Investment Limit: You can invest in a maximum of 4 kilograms of gold in SGBs per year. Gold ETFs do not have this limit.
Lock-in Period: You cannot sell your SGBs for the first 5 years. After this period ends, you can sell them on the stock exchange. Gold ETFs let you sell anytime without a lock-in.
Gold ETFs allow you to invest in gold without the need to hold it physically. They are flexible and simple to trade, but they involve certain costs and risks.
Pros
Transparent Pricing: Gold ETFs reflect the actual market price of gold. Unlike purchasing jewellery, there are no additional charges for making or purity.
Easy to Buy and Sell: You can trade Gold ETFs anytime on the stock exchange. There is no lock-in period, which makes them suitable for short, medium, or long-term goals.
No Time Limit: Gold ETFs function similarly to mutual funds. You can remain invested for as long as you prefer and earn returns based on gold price movements.
SIP Option Available: You can invest small amounts regularly through a Systematic Investment Plan (SIP), which helps in managing your budget effectively.
Can Be Used for Loans: Gold ETFs are accepted as security for loans, similar to shares.
Cons
No Fixed Returns: Gold ETFs do not offer fixed interest, unlike Sovereign Gold Bonds (SGBs). Returns depend entirely on market fluctuations in gold prices.
The choice between a Gold Bond and a Gold ETF depends on your investment purpose and duration. For short-term investments, Gold ETFs are better as they offer high liquidity, allowing investors to buy or sell at any time.
They have lower charges than physical gold, guarantee purity, and can be used as loan security. You can also invest in Gold ETFs through SIPs. However, for long-term investment, Sovereign Gold Bonds (SGBs) are ideal.
Sovereign Gold Bonds (SGBs) are government-backed securities issued by the RBI, linked to the market price of gold. They offer annual interest and can be held as an alternative to physical gold.
Gold ETFs could suit you if you are a short-term investor who needs easy buying and selling with flexibility. SGBs offer you interest income and tax benefits, making them a better choice for long-term investment.
You can choose Gold ETFs if you want exposure to gold without the need to hold physical gold. They eliminate storage issues, do not include making charges, and may offer tax benefits.
Gold prices may fluctuate, which can affect the market value of your investment. However, the amount of gold units you hold remains constant, preserving your original investment in terms of quantity.
Gold ETFs can be a suitable option for you if you require easy trading and quick access to funds. Your returns depend entirely on gold prices, and unlike SGBs, Gold ETFs do not provide regular interest.
You need to sell Gold ETFs on the stock exchange through your broker by using your demat and trading accounts.
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