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Gold ETFs or sovereign bonds: Where should you invest this Akshaya Tritiya

Gold ETFs or sovereign bonds: Where should you invest this Akshaya Tritiya?

Tue Apr 17 2018


Buying gold on Akshaya Tritiya is a tradition followed by many Indians for years now as it is considered auspicious and is thought to bring good luck. Even though the price of gold has not moved much over the past five years, many still flock to buy gold.

Now, if you are looking at investing in paper gold this Akshaya Tritiya you can do so either through Gold exchange-traded funds (ETFs) or Sovereign Gold Bonds (SGBs). Here, unlike physical gold, you will not get physical possession of the yellow metal instead you hold it as an investment which can be redeemed when you need it.

You can invest in SGBs through banks, Stock Holding Corporation of India, designated post offices, and stock exchanges like NSE and BSE. Units of gold ETFs can be purchased stock exchanges through brokers. Here is a closer look at SGBs and ETFs.



The government launched the sovereign gold bonds scheme in 2015 for those who wanted to invest in the precious metal. Rather than owning gold in physical form and keeping it idle without earning anything on it, SGB gives an opportunity to own gold and earn interest on it.


SGBs, however, are not available 'on-tap basis' yet. Instead, the government intermittently opens a window for the fresh sale of SGBs to investors. The first tranche of the financial year 2018-19 is currently open for subscription from April 16 till April 20.


The issue price for this tranche (2018-19-Series-I) of gold bonds is Rs 3,114 per gm of gold. The bonds will be issued on May 4. The issue price of the Gold Bonds will be Rs 50 per gram less for those who subscribe online and pay through digital mode. For such investors, the issue price of Gold Bond will be Rs 3,064.

For investors looking to purchase SGBs anytime in between, the only way is to buy earlier issues (at market value) which are listed in the secondary market. In July 2017, the government had floated the idea of SGBs that will be available 'on tap', however, it is yet to fructify.

Investments in SGB as compared to buying physical gold have certain well-defined benefits. While physical gold bought from jewellers or banks could come at a premium, of somewhere around 10 percent, the price of SGB is close to the actual price of gold.

Investments: One can invest for a minimum of 1 gram of gold. The maximum limit of subscribed is 4 kgs annually for individuals. The annual ceiling will include bonds subscribed under different tranches during initial issuance by the government and those purchased from the secondary market.

When you invest, an investor ID is issued which tracks the total investment made. You will also be issued a holding certificate. The bonds are also eligible for conversion into demat form. Only bonds held in demat form with depositories can be traded on stock exchanges.

Tenor and interest rate: The bonds come with a tenor of eight years with exit options available in the 5th, 6th and 7th years, to be exercised on the interest payment dates. The government has fixed an interest of 2.50 per cent per annum on the investment, with no compounding of interest. The interest will be paid in half-yearly rests and the last one shall be payable on maturity along with the principal.

Taxation: SGB's taxation is in favour of investors as the gains are exempted on maturity unlike physical gold where gains are subject to tax. Budget 2016-17 had made redemption of the bonds by an individual exempt from capital gains tax. Therefore, holding till maturity comes with tax advantage. Do keep in mind that redeeming via a the stock exchange may result in capital gains or loss and one may have to pay tax after indexation, if applicable, accordingly. Interest on the bonds is, however, fully taxable according to your income tax slab.

Liquidity: Investment in Gold ETFs is more liquid as compared to investment in SGB. Redeeming the units is entirely online and without any lock-in period in case of Gold ETFs.

Gold ETFs

An alternate way of owning paper gold in a more cost-effective manner is through gold ETFs. Such investments (buying and selling) happen on a stock exchange (NSE or BSE) with gold as the underlying asset.

Pricing: The high initial buying and even selling charges that come with owning gold jewellery, bars or coins gives an extra edge to the low-cost gold ETF. The transparency in pricing is another advantage. The price on which it is bought is probably the closest to the actual gold prices and therefore the benchmark is the physical gold price.

Investments: What you need is a trading account with a share broker and a demat account. One may either buy in lump sum or even at regular intervals. You can invest for as low as 1 gram of gold. It is advisable to invest systematically rather than try to time the market.

GOLD ETF's listed on NSE

  • Axis Gold ETF
  • Goldman Sachs Gold Exchange Traded Scheme
  • UTI GOLD Exchange Traded Fund
  • HDFC Gold Exchange Traded Fund
  • ICICI Prudential Gold Exchange Traded Fund
  • Kotak Gold Exchange Traded Fund
  • Quantum Gold Fund (an ETF)
  • Reliance Gold Exchange Traded Fund
  • Religare Gold Exchange Traded Fund
  • SBI Gold Exchange Traded Scheme
  • Birla Sun Life Gold ETF
  • IDBI Gold Exchange Traded Fund
  • Motilal Oswal MOSt Shares Gold ETF
  • Canara Robeco Gold Exchange Traded Fund

Charges: Even though there are no entry or exit charges, you should factor in these three costs. First, is the expense ratio (for managing the fund) of around 1 percent. Second, is the broker cost that needs to be accounted every time you buy or sell gold ETF units. Third, which technically is not a charge but impact returns is the tracking error. It arises because of the fund's expenses and cash holdings, thus not mirroring actual gold prices.

Taxation: Although the risk of owning and holding doesn't exist in both, there is a big difference on the taxation front. Gains on SGB upon redemption are tax-exempt but gains made on gold ETFs after 3 years are subject to 20 percent tax post indexation

Liquidity: However, a gold ETF is more liquid. Further, owing ETF units is much easier than SGB as the process is done entirely online.

What should you opt for?

SGB benefits those who want to invest in gold for the long term as it comes with a maturity period of eight years (lock-in ends from the 5th year). Another disadvantage of the gold ETF is that its units won't earn the additional interest of 2.5 per cent per annum. Keep factors such as taxation and liquidity while evaluating these two investments options.

Keep all of these pros and cons of both of these investment avenues while choosing between the two. Select the product depending on how comfortable you are managing investments online and keep the worries of purity, security aside.

However, before you make your investment decision, narrow down on the reason as to why you want to invest -- is it for an occasion like a wedding or is it for wealth creation. Further, make sure you do not put in more than 10 percent of total portfolio in gold, be it physical or paper gold.


Source: https://economictimes.indiatimes.com