Gold Exchange Traded Funds (ETFs) offer the flexibility of stock investment and the simplicity of gold investments.They are traded in the cash market. On the other hand,Sovereign Gold Bonds (SGBs) can be purchased from the secondary markets. The Reserve Bank of India (RBI) issues SGBs on behalf of the government during a financial year.
Gold ETFs vs Sovereign Gold Bonds: Risk appetite
Choosing between gold bonds and gold ETFs often poses a dilemma for investors. Amit Khare, Associate Vice President at GCL Broking explains that SGBs are backed by the Government of India, offering a safe haven with regular interest payments and potential capital appreciation upon maturity. On the other hand, gold ETFs are traded on stock exchanges and provide the flexibility of buying and selling at market prices, aligning their performance directly with gold’s price movements., Khare told ET.
Khare recommends that risk-averse investors seeking a steady stream of income and capital preservation may opt for gold bonds, while investors with a higher risk appetite and a focus on short-term gains may gravitate towards gold ETFs. He also mentions that gold ETFs are highly liquid and there is no maximum investment limit.
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According to Alekh Yadav, Head of Investment Products at Sanctum Wealth, the decision to invest in SGBs or Gold ETFs depends on factors such as the holding time period, need for liquidity, amount of investments, and individual tax rates.
SGBs enjoy liquidity in the secondary market, but there are limitations. An individual investor can buy a maximum of 4 kgs worth of SGBs in a given financial year.
Gold ETFs vs SGBs: Where does the advantage lie?
SGBs have some tax advantages over Gold ETFs. If held till the maturity period of 8 years, investors are exempt from paying taxes on capital appreciation linked to gold prices. If traded in the secondary market after 1 year of holding, capital gains on SGBs are taxed at 10%, while the 2.5% annual interest is taxed at the marginal tax rate. On the other hand, gold ETFs are now taxed at the marginal tax rate after a recent tax change in March 2023.
SGBs offer the added advantage of a sovereign guarantee and provide a 2.5% yearly interest in addition to the appreciation of gold price during the holding period.
Gold ETFs are also available as mutual fund schemes. In September, net inflows in Gold ETF schemes came in at Rs 175.29 crore, a significant increase from Rs 22.23 crore in August.
Retired Colonel Rakesh Goyal, Founder & CEO at Let’s Invest Wisely, explains that SGBs have an advantage over ETFs as they do not have any management fees or expense ratios associated with them. On the other hand, investors in gold ETFs have to bear the expense ratio that covers management fees and other operational expenses, although it is low.
Goyal agrees with other experts that the decision between Gold ETFs and SGBs depends on investment goals and preferences. If an investor wants an investment that pays interest and is backed by the government, Gold Bonds may be more appealing. However, if they prefer liquidity and simplicity of trading on stock exchanges, Gold ETFs may be a better choice, he concluded.