How to choose Sovereign Gold Bond (SGB) Vs Gold ETF

Sovereign Gold Bond (SGB) and Gold ETFs such as Goldbees are two popular investment options for those who want to invest in gold. This article will guide you in choosing which one to choose for investment since both have their own advantages and disadvantages.

Here are some key differences between the two:

  1. Nature of investment: SGBs are government securities denominated in grams of gold. They are issued by the Reserve Bank of India on behalf of the Government of India. On the other hand, Gold ETFs are exchange-traded funds that invest in physical gold.
  2. Price: The price of SGBs is determined by the physical gold prices prevailing on the issuance date. In contrast, the price of Gold ETFs is determined by the prevailing NSE market price of gold.
  3. Liquidity: Gold ETFs are more liquid compared to SGBs, as they can be bought and sold on stock exchanges during market hours just like any other stock. SGBs can be traded on stock exchanges too but their liquidity is comparatively lower as they are issued for a limited period of time and are not actively traded.
  4. Buying Cost: Gold ETFs have lower costs compared to SGBs. Hence single unit of Gold ETF can be purchased if we have a few hundred rupees, whereas SGB needed to purchase in terms of grams which will cost a few thousand rupees. The Gold ETF will cost extra brokerage and NSE transaction cost every time we place orders in the broker terminal. The SGB will cost 50 rupees less when ordered through the electronics system (via the broker terminal).
  5. Extra Benefit: The purchaser of SGBs will get an annual interest rate of 2.5% to the purchase value and there is no such benefit for Gold ETFs. SGB gold price will be appreciated by raise in physical gold price whereas Gold ETF price will depend on exchange-traded value. The exchange-traded value depends on physical gold value minus expenses incurred to secure the physical gold (vault expense).
  6. Taxation: The long-term capital gains on SGBs are exempt from tax if held until maturity. For Gold ETFs, the tax rate is 20% with an indexation benefit if held for more than three years. The investment in SGBs is eligible for EEE status, which means that the investment amount, interest earned, and maturity proceeds are all tax-free
  7. Security: SGBs are considered to be a safer option than Gold ETFs as they are backed by the Government of India. In contrast, Gold ETFs carry counterparty risk as the value of the ETF is dependent on the ability of the issuer to honour the underlying asset.

In conclusion, both SGBs and Gold ETFs are good investment options in their own right, depending on your investment goals and risk profile. SGBs may be a better option for those looking for a safe investment and don’t mind about maturity which is 8 years. Along with the government guarantee the SGB purchaser will also get 2.5% annual interest on the invested value. The Gold ETFs may be more suitable for those looking for frequent buy and sell, and having only a few hundred of money to invest in Gold.

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