Sovereign gold bonds or ETFs, which is the better gold investment?

Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn
  • Both are well-regulated instruments, far better than the physical mode of holding gold
  • SGBs score hands down on returns with regular interest, no expenses and better taxation at maturity
  • Both liquidity of and taxation on SGBs  are negatives if you cash out before maturity
  • Use SGBs for your long-term gold allocations and add gold ETFs during market dips

In an earlier article, we had suggested that having a 5-10% allocation to gold in your portfolio is a good strategy if you’re an Indian equity investor wanting to hedge against unexpected downside. But what is the best way to acquire this gold exposure?

Buying physical gold both in jewellery and coin/bar form is avoidable in India because of quality issues and the lack of liquidity.

Sovereign Gold Bonds (SGBs) issued by the RBI on behalf of the Centre and Gold Exchange Traded Funds (ETFs) are more efficient paperless modes to invest in gold in India. But how do they stack up against each other?

Ease of buying

Gold

SGBs are issued by the Government of India through limited period offers that open 6 to 7 times a year. Each SGB series is usually open for 5 days, when they are available through commercial banks, the stock exchanges, stock brokers and designated post office branches. You can apply either through electronic or physical mode. Allotment is typically completed within 5 days. The bonds can be held in demat form or through physical certificates. The minimum investment is 1 bond, which represents one gram of gold and the maximum capped at 4 kg per fiscal year.

Gold ETFs offered by mutual funds are available through the stock exchanges like shares and require a demat account. One ETF unit may represent one or half a gram of gold. AMCs offer open-end fund of funds that allow you to invest in gold ETFs without a demat account, but they carry an extra layer of costs towards AMC management fees, which can eat into returns.

If you are looking to time your gold purchases to declines in gold market prices or acquire your gold holdings through monthly SIPs, gold ETFs are more convenient than SGBs. Buying SGBs in primary offers requires you to hold cash awaiting an offer and the offers aren’t particularly well-timed to lows in market prices of gold.

SGBs once issued are listed and traded on the stock exchanges and can be bought from the secondary market too. But trading volumes are thin for most SGB series. Because each series of SGBs carries a different maturity and interest rates (earlier tranches offered 2.75%, recent ones offer 2.5%), it can be difficult to identify the right SGB to buy. At the time of writing this, the quoted prices of SGBs (each representing one gram of gold) varied from Rs 3750 to Rs 4000. You will need to familiarise yourself with the interest rates, maturity dates, volumes, and quoted price of each SGB series, to home in on the one that is the best option.  

buy hold sell

Returns

In terms of returns, SGBs score over gold ETFs hands down, on three counts. One, in SGBs apart from the capital appreciation (or depreciation) in the price of gold, you get to earn a half-yearly interest on your holdings. Recent tranches pay interest at 2.5 per cent per annum on the nominal value of the SGB (which is based on the gold price at the time of the offer). In gold ETFs, your only return comes from appreciation (or depreciation) in the price of gold during your holding period.

Two, while gold ETFs charge an annual expense ratio of 0.40-0.80 per cent a year, SGBs carry no such costs, adding to your returns.  

Three, while buying/selling gold ETFs from the market, the premium/discounts in market prices against NAV can dent your returns. In SGBs, if you buy in primary offers and hold till redemption, you get prevailing market prices of gold. 

Liquidity

Every series of SGBs has a fixed maturity date set eight years from the date of the issue and is redeemable at the prevailing price of gold at maturity date. Early redemption is allowed via RBI after the completion of the fifth year, with the redemption value set at the average closing prices for the previous 3 working days. But early redemption proceeds will only be paid on the interest payment dates of the SGB. Investors seeking exits from SGBs at other times will need to take the market route to sell their holdings. But this may be hampered both by low trading volumes and SGB market prices trading away from gold prices.

Of the 35 distinct series of SGBs listed and traded on the NSE while writing this, 9 registered no trading volumes on the day we took stock, 23 saw a traded value of less than Rs 1 lakh for the entire day and only one series saw a traded value of over Rs 10 lakh.

Of the 35 distinct series of SGBs listed and traded on the NSE while writing this, 9 registered no trading volumes on the day we took stock, 23 saw a traded value of less than Rs 1 lakh for the entire day and only one series saw a traded value of over Rs 10 lakh.  The thin volumes effectively mean that you may have to wait for several days/weeks to liquidate your SGBs if you have a sizeable portfolio allocation to them. This may impede your ability to time your exit from SGBs to a spike in gold prices, or to quickly encash them in case of financial need.

Gold ETFs are more liquid than SGBs. Of the 11 gold ETFs that are currently listed, every one was traded while writing this. But of these, only two ETFs registered low trading value of just about Rs 1 lakh for the day (Birla Sun Life and Invesco Gold ETFs), five reported traded value of Rs 5-10 lakh (IDBI, Quantum, UTI, Axis and ICICI Pru) and four registered traded value of over Rs 50 lakh for the day (Kotak, HDFC, SBI and Nippon Gold Bees). Nippon Gold Bees was the most actively traded. 

Investors may be better off sticking to the highly traded ETFs for better liquidity and less price distortion relative to NAV.

prime funds

Taxation

SGBs offer a better deal on the taxation front. If you buy SGBs and hold them till their maturity of 8 years, the proceeds are completely exempt from capital gains tax, as a special dispensation. But if you sell them in the market or after the 5-year lock in, the gains you make are taxable as capital gains. The gains will be taxable at your slab rate if your holding period is less than 36 months and at 20% with indexation benefits for holding longer than that. The capital gains tax exemption on maturity is only available to individuals. The interest you receive on SGBs is taxable at your slab rate.

SGBs offer a better deal on the taxation front. If you buy SGBs and hold them till their maturity of 8 years, the proceeds are completely exempt from capital gains tax, as a special dispensation.

Gains on Gold ETFs are treated as short term capital gains and taxed at your slab rate if you hold them for less than 36 months. They are treated as long-term gains and taxed at 20% with indexation benefits if held for over 36 months.    

Our take

So, given that SGBs and gold ETFs have their own pros and cons, which should you go for?

  • If you are accumulating gold towards a long-term goal such as a family wedding or a constant passive allocation in your portfolio, SGBs offer a better deal with low costs, better returns and friendly tax treatment at maturity. You can invest in SGBs as and when their primary issues open up. At this point, the lack of liquidity in the secondary market makes it a tricky route for investors unfamiliar with gold prices to identify the right SGB series.
  • You can supplement the long-term SGB investment through one-off gold ETF purchases when sharp declines in gold prices offer a buying opportunity.  
  • If you want to make monthly investments like an SIP, then go for ETFs. This also makes sense make you are using gold as part of your asset allocated portfolio.
  • When gold present opportunities to buy, we will come up with a call on when to invest and which instrument to invest in.
combo
Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail [email protected].  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

17 thoughts on “Sovereign gold bonds or ETFs, which is the better gold investment?”

  1. I want to understand what will be the value of the SGB Series 2 issued on 15-5-2020.
    Will it be at some reference price, how will that be determined?
    For example: issue price was 4650 say
    And after eight years, let’s say mcx gold is writing at say 7500 (assume),
    Then how much will I get if I have 100units?

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : Redwood Research (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200007478). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information is provided on an ‘As Is’ basis by PrimeInvestor. Information herein is believed to be reliable but PrimeInvestor does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor are on a best effort basis. PrimeInvestor does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor or any other agency appointed/authorised by PrimeInvestor. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Mutual Fund Investments are subject to market risk, read all scheme related documents carefully. As a condition to accessing PrimeInvestor’s content and website, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Redwood Research or its affiliates to any registration or licensing requirement.

• Aditya Birla Mutual Fund • Axis Mutual Fund • Baroda Mutual Fund • BNP Paribas Mutual Fund • BOI AXA Mutual Funds • Canara Robeco Mutual Fund • DSP Mutual Fund • Edelweiss Mutual Fund • Essel Mutual Fund • Franklin Templeton Mutual Fund • HDFC Mutual Fund • HSBC Mutual Fund • ICICI Mutual Fund • IDBI Mutual Fund • IDFC Mutual Fund • IIFL Mutual Fund • Indiabulls Mutual Fund • Invesco Mutual Fund • ITI Mutual Fund • Kotak Mahindra Mutual Fund • L&T Mutual Fund • LIC Mutual Fund • Mahindra Mutual Fund • Mirae Asset Mutual Fund • Motilal Oswal Mutual Fund • Nippon India Mutual Fund • PGIM Mutual Fund • PPFAS Mutual Fund • Principal Mutual Fund • Quant Mutual Fund • Quantum Mutual Fund • Sahara Mutual Fund • SBI Mutual Fund • Shriram Mutual Fund • Sundaram Mutual Fund • Tata Mutual Funds • Taurus Mutual Funds • Union Mutual Funds • UTI Mutual Funds • Yes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds
Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation

Scroll to Top
Login to your account