In this article, we will try and explore the key features and salient differences between Gold ETF vs SGB and SGB vs Physical Gold
Since time immemorial, gold has been a highly sought-after commodity and continues to remain so. It is also deemed auspicious in many cultures. Apart from that, not only is it considered a very safe and desired investment option but many people also use it to hedge their portfolio against market volatility and inflation. In fact, during the ongoing global pandemic and consequent economic instability gold had become the investment of choice thereby shooting the prices up to a record high last August.
Through this article, we will explore the few common ways of investing in gold and compare Gold ETF vs SGB and SGB vs Physical Gold.
While physical gold is a well-known commodity and self-explanatory concept before we compare and contrast, let us first quickly understand the other 2 aforementioned options.
Gold ETFs (Exchange Traded Funds) is an investment tool that is based on the domestic price of physical gold. 1 unit of this ETF equals to 1 gram of 99.5% pure gold. These ETFs are listed in both NSE (National Stock Exchange of India Limited) and BSE (Bombay Stock Exchange) and can be bought and sold at market prices, just like any other regular stock. This means, when you buy the gold it is in electronic form and when you sell or redeem then you get the amount as per the market price. No physical gold is involved in the transaction. It is a rather transparent process and requires a demat account and most commonly a broker.
It is well suited to those people who wish to have gold as part of their investment without the hassle of storing gold in its physical form.
SGB (Sovereign Gold Bonds) are a form of securities provided and guaranteed by the Government of India and issued by the Reserve Bank of India. Just like the ETF they are also a substitute to owning physical gold. These bonds are issued in denominations of 1 grams onwards with 1 gm being the minimum and 4 kg being the maximum subscription limit for individual investors. These bonds are usually released in tranches and sold through the offices of most nationalized and few leading private banks via offline and online modes. One of the important aspects in Gold ETF vs SGB is that Sovereign Gold Bonds are issued at a fixed price which is calculated as an average of the closing price of gold of 999 purity in the last 3 business days of the week just prior to the subscription period. The redemption price is also calculated in the same manner as the issuing price.
Traditionally, this is the most prevalent form of gold investment in the country. It is easily accessible to all and has deep-rooted religious and cultural connotations. Think of a wedding across the country and the one aspect that transcends all other differences is – gold jewelry. There is no brokerage or intermediary authority involved. However, there is always the cost of storing the physical gold (think bank lockers). There can also be associated making charges when in the form of ornaments. Also, there is a high risk of theft. Prices are not standard across the country and also vary among individual establishments. Another risk is the guarantee of the purity and being conned.
Now that we are more clear about the main characteristics of ETF and SGB as financial tools, let us do a comparison to examine the similarities and key differences.
Gold ETF vs SGB
Both of them are a simple way of having gold exposure in your portfolio without the hassles of owning and storing physical gold. Since you can own gold in electronic form starting with as little as 1 gm it is also well suited to a wider range of investors based on their buying capacity. Moreover, the investor does not need to incur peripheral costs such as making charges, etc.
One advantage that SGB has is that it promises a fixed return of 2.5% (subject to change as per government announcements) on your initial investment throughout the period the bonds are held.
SGBs have a lock-in of 5 years whereas ETF units can be redeemed as per the holder’s choice. To be able to invest in an ETF a demat account is mandatory which is not the case in owning bonds. But then the ETF does not limit how many electronic units you can hold whereas the SGB has a limit of 4 kgs for individuals and 20 kgs for firms and trusts.
SGB vs Physical Gold
Physical Gold remains an important culturally auspicious and social status symbol. It is unlikely to be replaced in this form when it comes to ornaments, jewelry, and social events. It has no lock-in period thereby making it easily liquidable. It can be easily purchased, sold, and exchanged at most jewelers across the world.
SGBs on the other hand, are issued by the RBI on behalf of the GOI. It is the government that decides a fixed price while issuing the bonds and also while paying out (albeit these prices are also market-driven as in all the 3 investment options under discussion). However, the government also provides 2.5% returns on the initial investment. In terms of liquidity, physical gold definitely scores over SGB since the bonds have a 5-year lock-in before they can be traded on the stock exchange. The capital gains tax on bonds’ redemption after maturity is zero.
To sum up; in India, gold is not just an investment tool but also a socially and emotionally significant asset. This has been the case for centuries. While some people may buy it as a means of hedging, others may buy it for diversification and some others still, for sheer ornamental value. Understanding the differences between these types will help you in your investment decisions.