1. If you are looking at investing in Gold in electronic form you can do so either through Gold exchange-traded funds (ETFs) or Sovereign Gold Bonds (SGBs). Here, unlike physical gold, you will not get physical possession of the Goldl instead you hold it as an investment which can be redeemed when you need it.
ETFs or SGBs provides a superior alternative compared to holding gold in physical form. The risks like theft, burglary, purity, and costs of storage or loss on conversion associated with physical gold are eliminated.
Gold exchange-traded funds (ETFs)
These are exchange-traded funds which can be bought and sold on exchanges. Since the benchmark of gold ETF is physical gold price, you can buy it close to the actual price of gold. To buy gold ETFs you need to have a trading account with any shareholder and a demat account. Unlike physical gold, which come with high initial buying and selling charges, gold ETF costs much lower.
Features of gold ETFs
Risk of theft: Risk of theft when investing in Gold ETFs is very little as compared to physical gold.
Investment: Minimum investment can be made for as low as 1 gram of gold. You can also invest via the SIP route rather than making investments in a lump sum and trying to time the market.
Taxation benefits: If you hold gold ETFs for more than 3 years, the capital gain is subjected to 20 percent tax post indexation.
Purity concern: Purity is not a problem as they are held in electronic (demat) form. Also, because of its direct gold pricing, there is complete transparency in the holdings of an ETF.
Disadvantages
Broadly, two charges are applicable:
- The expense ratio (fund management charges) of around 1 percent.
- The broker cost that needs to be accounted for every time you buy or sell gold ETF units on an exchange.
You also need to have a demat and a trading account to buy gold ETF from the exchange.
2. Sovereign Gold Bonds (SGB)
These are Government securities issued in multiples of one gram of gold. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and are traded on an exchange. These can also be used as collateral for taking loans.
Investors should have gold in their portfolio, as it provides diversification, however, they should not allocate more than 10% of their assets in gold. While investing in gold bonds you should also keep the lock-in period in mind. Gold bonds suit those with a longer time horizon, as these bonds come with a long maturity and limited liquidity in the secondary market.
Features of SGB
Risk of theft: Risk of theft is low as compared to physical gold.
Interest earned: The government has fixed 2.5 percent assured interest per annum on the issue price. The interest is paid half-yearly and the last installment is payable on maturity along with the principal.
Taxation benefits: TDS (tax deducted at source) is not applicable on interest. According to an RBI notification, the capital gains tax arising on redemption has been exempted for an individual. The indexation benefits will be provided in case of LTCG arising to any person on transfer of bond.
Purity concern: Gold bond prices are linked to the price of gold of 999 purity (24 carats) published by India Bullion & Jewellers Association (IBJA).
Benefits : Investments in SGB as compared to buying physical gold have certain well-defined benefits. While physical gold bought from jewellers or banks could come at a premium, of somewhere around 10 percent, the price of SGB is close to the actual price of gold.
Disadvantages
Liquidity can be a bit of concern as the bond has a tenor of 8 years. Also, the lock-in period is for five years. You can only withdraw money from the 5th year on the date on which the interest is payable.
SGB or ETFs : Which is Better
Investment in Gold ETFs is more liquid as compared to investment in SGB. Redeeming the units is entirely online and without any lock-in period in case of Gold ETFs. An alternate way of owning paper gold in a more cost-effective manner is through gold ETFs.
Investing in SGB is superior compared to Gold ETFs, as you will also be paid an interest of 2.50% (fixed rate) per year on the amount of initial investment. Interest will be credited semi-annually to your bank account and the last interest will be paid on maturity along with the principal.
Though the tenure of the bond is 8 years, you can redeem the bonds after the fifth year from the date of issue on coupon payment dates. The bonds will be tradable on Exchanges if held in the Demat form and can be transferred to any other eligible investor.
Comparing Physical Gold With Gold ETFs & SGBs
| Particulars | Physical Gold | Gold ETF | Sovereign Gold Bond |
|---|---|---|---|
| Returns/earnings | Lower than real return on gold due to making charges | Less than actual return on gold | More than actual return on gold |
| Safety | Risk of theft, wear/tear | High | High |
| Purity | Purity of Gold always remains a question | High as it is in Electronic Form | High as it is in Electronic Form |
| Gains | LTCG after 3 years | Long term capital gain post after 3 years | LTCG post 3 years. (No capital gain tax if redeemed after maturity) |
| As loan collateral | Accepted | Not accepted | Accepted |
| Tradability or exit formalities | Restrictive | Tradable on Stock Exchange | Can be traded and redeemed from the 5th year with government |
| Storage expenditures | High | Minimal | Minimal |
