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 explore SGB vs gold funds in detail 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 ETF?

A gold ETF, or exchange traded fund is a kind of mutual fund that is traded on the stock exchange similar to traditional stocks. It provides an alternative way to invest in paper gold and has the precious metal as its underlying asset.

One unit of a gold ETF is equal to 0.5 grams of 24-carat gold and trades at the current market price of physical gold.

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.

6. Anyone can start investing in SGBs, whether they're individuals, HUFs, universities, charitable institutions, or trusts. It supports both single and joint holding.

7. You can use SGB as collateral to take a loan. The loan-to-value ratio, which is typically used for gold loans, also applies to SGBs.

8. SGBs are held in digital or paper form, unlike physical gold. This means you don't need to worry about storing them securely.

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 the difference in actual price and prevailing price of gold.

4. SGBs are not suitable for investors who want to buy gold for personal use. This is because there's no option to convert SGBs into physical gold.

5. While SGBs are a popular investment vehicle, they sometimes see trading volumes. This can make it difficult for investors to exit at fair prices before maturity.

6. The value of SGBs depends on the current price of gold. If gold prices fall, your investment value may drop in the secondary market.

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.

6. Since you are investing in digital gold, you don't have to worry about theft, purity, or storage costs.

7. Prices of Gold ETFs closely track real-time domestic gold prices. This ensures a fair and transparent valuation.

8. Gold ETFs are a great way to diversify your portfolio as they act as a hedge against inflation and currency fluctuations.

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.

4. You need a Demat and trading account to invest in Gold ETFs.

5. Similar to SGBs, there's no provision to convert Gold ETFs into physical gold. This makes them an unsuitable option for traditional investors.

Additional Read: The relationship between economic downturns and gold

Conclusion

While both SGBs and Gold ETFs offer safer and smarter alternatives to physical gold, they serve different investor needs. If you're looking for long-term returns with tax benefits and fixed interest, SGBs are the better choice. But if you want liquidity and flexibility, it’s better to opt for Gold ETFs.

So, evaluate your investment horizon, risk appetite, and income goals before choosing. And when you're ready to take the next step, download the Tata Moneyfy app to start investing in gold smartly and securely.