SGB Vs Gold Fund: Which is a Better Investment?

There's no doubt that gold holds immense value for Indian households and is more than a precious metal. In fact, it is considered auspicious to buy gold on occasions such as Dhanteras and Akshaya Tritiya. However, from an investment point of view, investing in physical gold may not fetch you the best returns. But that doesn't mean investing in gold is not fruitful anymore. Instead, you can pick alternate forms of investing in gold, such as – SGBs and Gold funds.

These investment instruments allow you to invest in gold without having to purchase it in physical form. Read this article to learn more about the two options and determine which one is a better investment.

What is an SGB?

Sovereign Gold Bonds (SGBs) are government securities that are issued by the Reserve Bank of India. Essentially, they are the substitutes for physical gold and are thus, denominated in grams. By investing in SGBs, you can own gold but not in a physical form and earn steady interest on it.

Furthermore, with SGBs, the quantity of gold you purchase remains protected because you get the current market price at the time of redemption. If you invest in SGBs, you must pay and redeem the price in cash. What's more, these bonds can be converted into Demat form and traded on the stock exchange, which is pretty convenient.

What is a gold fund?

Gold funds are a variant of mutual funds that directly or indirectly invest in gold reserves. The investment is made on stocks of mining companies, gold distributing and producing syndicates, and physical gold.

Moreover, these are open-ended investments that invest in units of a Gold Exchange Traded Fund (ETF). You can diversify your investment portfolio by investing in gold funds and create a safety cushion against market fluctuations and collapse.

Additional Read: What is Digital Gold? Why Should One Invest in It?

Pros & cons of investing in sovereign gold bonds (SGBs)

Pros of investing in SGBs

1. SGBs are a safe investment option for those seeking investments for a long-term horizon, typically 5 to 8 years.

2. SGBs carry an assured rate of interest that is half-yearly. The last interest is paid at maturity at the end of 8 years from the bond issue date.

3. Anyone can invest in SGBs – individuals, societies, HUFs, trusts, etc.

4. It also allows individual and joint account holding and nomination facilities.

5. SGB is tax-friendly. SGB redemption is exempt from capital gains tax. However, the interest earned is taxable at the hands of the investor.

Cons of investing in SGBs

1. Unlike gold ETFs with no upper limit to investment, you can only invest in SGBs in a maximum of 4 kgs.

2. SGBs have a lock-in period of 5 years from the bond issue date. They can only be traded in the secondary market after the lock-in period.

3. The redemption price of SGBs at the time of maturity is calculated based on the simple average of the closing price of 999 purity of gold in the last 3 business days before redemption. These prices are stipulated by The India Bullion and Jewellers Association Limited. This can result in a possible marginal loss due to difference in actual price and prevailing price of gold.

Pros & cons of investing in gold exchange-traded funds (ETFs)

Pros of investing in ETFs

1. ETFs have transparent pricing, typically closer to the actual market price of gold than its physical form.

2. Gold ETFs are more liquid than SGBs as they don't carry a lock-in period and can be traded easily in the open market at free will.

3. Gold ETFs are typically open-ended mutual fund schemes where investors can stay invested for as long as they want to.

4. You can also invest in ETFs through SIP.

5. ETFs are often also accepted as collaterals for loans.

Cons of investing in ETFs

1. Unlike SGBs, ETFs do not carry a fixed interest rate or guaranteed income, as the returns are based on market fluctuations.

2. Capital gains from ETFs are taxable.

3. While gold ETFs do not carry any entry or exit load fees, they do incur other charges, including fund management charges, brokerage at the time of entry or exit, and administrative charges to cover the expenses of the fund.

Which is the better investment option?

Now that you have a brief idea about SGBs and gold funds, let's compare the two investment options on similar parameters.

Security

Since SGBs are issued by RBI on behalf of the government, you get a sovereign guarantee on the principal repayment and payment of interests. Therefore, you can be assured that you will get your dues back on maturity. This is why SGBs are one of the safest methods to invest in gold.

Further, gold funds are also a safe investment option as they are regulated by the Securities and Exchange Board of India.

Liquidity

Gold funds can be liquidated without much hassle and are easier to trade. Hence, they are ideal as a financial cushion against financial contingencies. On the contrary, SGBs are not as liquid as gold funds and are beneficial if the investment is held until maturity.

Tax benefit

SGBs are an excellent tax-saving option and will fetch you maximum benefit if you hold your bonds till maturity. However, the interest you earn on the bonds is taxable under the Income Tax Act, 1961.

Additional Read: The relationship between economic downturns and gold

Your turn

Needless to say, both investment options are safer than investing in the physical form of the precious metal. However, there is no clear winner. Consider your financial goals to determine which option is better for you.

And when you are ready to begin your investment journey, make sure to download Tata Capital's Moneyfy app to manage your wealth seamlessly!

FAQs

What is the disadvantage of gold ETFs?

Gold ETFs don't offer a fixed interest rate and rely solely on gold price appreciation. Additionally, they come with brokerage fees and are subject to capital gains tax.

Is buying gold ETF a good investment?

Gold ETFs are a good investment for liquidity, diversification, and ease of trading. However, returns depend on gold price movements, and ETFs do not offer regular income like SGBs.

Is SGB better than buying gold?

SGBs are better for long-term investors as they offer interest income and tax-free returns upon maturity. However, they lack the liquidity and flexibility that physical gold or ETFs provide.

Is gold ETF better than SGB?

Gold ETFs are better for short-term investors seeking liquidity and flexibility. SGBs, however, provide interest and tax benefits, making them more suitable for long-term investment.