Sovereign gold bonds v/s gold ETFs: Which is better?
What's the story
Investing in gold has always been a popular choice, but with the advent of digital platforms, investors now have the option to invest in gold exchange-traded funds (ETFs) or sovereign gold bonds (SGBs). Both options come with their own set of benefits and drawbacks, making it important for investors to understand them before making a decision. Here's a look at the differences between gold ETFs and SGBs.
#1
Understanding gold ETFs
Gold ETFs are funds that invest in physical gold and trade on stock exchanges like shares. They offer liquidity, as they can be bought and sold throughout the trading day. Gold ETFs come with lower management costs than mutual funds, making them an attractive choice for investors looking for a cost-effective way to invest in gold.
#2
Benefits of Sovereign Gold Bonds
Sovereign Gold Bonds are government securities that are denominated in grams of gold. They provide fixed interest rates (currently 2.5% per annum) and have a maturity period of eight years. Unlike physical gold, SGBs eliminate storage costs and risks of theft. They also allow premature redemption after five years, giving some flexibility to investors.
#3
Cost considerations for investors
When choosing between gold ETFs and SGBs, cost is an important factor to consider. Gold ETFs usually have lower expense ratios than mutual funds but may incur brokerage fees during transactions. On the other hand, SGBs do not have any transaction costs other than the initial purchase price, making them cheaper for long-term investors.
Tip 1
Tax implications on investments
Tax implications also differ when investing in gold ETFs or SGBs. Long-term capital gains from both investments are taxed at 20% with indexation benefits if held for more than three years. However, SGBs also offer tax exemptions on interest earned if held till maturity, which isn't the case with gold ETFs.