Ashutosh Gupta explains the difference between gold ETFs and sovereign gold bonds
30-Mar-2022
How do sovereign gold bonds compare with gold ETFs? Are SGBs a better option?
- Joseph Samuel
For those looking to invest in gold, sovereign gold bonds (SGBs) are superior to gold ETFs. They offer a 2.5 per cent per annum rate of interest over and above the appreciation in the price of gold that these bonds would fetch, and gold ETFs only fetch appreciation in the price of gold. There is a 2.5 per cent extra return from sovereign gold bonds.
The second is around the cost. Sovereign gold bonds don't have any ongoing cost of ownership, and gold ETFs have an expense ratio of around 1 per cent. So that's a cost that investors who remain invested in the gold ETFs have to pay. SGBs trump over gold ETFs.
The third aspect where SGBs are miles ahead of gold ETFs is taxation. In the case of SGBs, the capital gains you make on the appreciation in the price of the gold is completely tax-free. You only have to pay tax on the 2.5 per cent interest, which gets added to your income and taxed per the slab system. In contrast to that, in the case of gold ETFs, you have to pay capital gains tax on the price appreciation of gold that you achieve, and they are taxed as a non-equity capital gain. So there again, SGBs are miles ahead.
The only aspect where SGBs trail behind gold ETFs is liquidity. In the case of SGBs, liquidity is unavailable in the first five years. After that, you can redeem them directly with the RBI, but you can only sell them on a stock exchange in the initial five years. While the practical experience is that these bonds usually do not have a lot of liquidity on the stock exchange, and you have to live with lower liquidity in the first five years. In contrast, gold ETFs or at least some of them, have fairly robust liquidity, and they trade in fairly robust volumes on stock exchanges. So in the case of those gold ETFs, liquidity may not be much of an issue. To sum it up, for an investor for whom liquidity is not a big concern, certainly, SGBs look like a better option.
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