How Do Sovereign Gold Bonds Compare to Other Gold Investment Options?

Gold has always been among the most popular investment options, especially in India, where purchasing gold is a ritual during festivals such as Diwali and weddings. However, with the skyrocketing price of gold, people are looking for alternative forms of investment in gold for many purposes, such as to avoid the hassle of holding physical gold and to get better returns. Therefore, this blog will compare sovereign gold bonds to other gold investment options available. 

What are Sovereign Gold Bonds?

Sovereign Gold Bonds (SGBs) are government securities issued by the Reserve Bank of India (RBI) on behalf of the central government. The underlying assets of these bonds are gold; each unit is one gram of gold. SGBs provide fixed interest to the investors. SGBs can also be sold in the secondary market after 14 days of issuance; the investor can earn capital gains based on the market rates of gold. 

The minimum investment in SGBs is one gram, and the maximum is 4 kgs for individuals and Hindu Undivided Families (HUF); trusts and corporations can buy up to 20 kgs. You can purchase bonds individually or jointly. However, the limit applies to the first applicant in case of a joint application. 

To apply to SGBs, you can visit the branches of nationalised banks, foreign banks, scheduled private banks, designated post offices, and Stock Holding Corporation of India Limited (SHCIL). You can also apply for these bonds online or from the internet banking of authorised commercial banks. SGBs are held in certificates and can be converted into digital format and stored in your Demat accounts.

Other Gold Investment Options

Physical Gold Investment

The most preferred form of gold is in tangible form. People purchase physical gold in the form of jewellery, gold coins, gold biscuits and bars. People keep the purchase of physical gold very confidential, unlike digital gold.  People can purchase the precious metal directly from any jeweller, and no intermediary is involved. Physical gold has no limit to purchasing. Gold biscuits come in a minimum of 10 grams, and the minimum investment is higher in physical gold. Investors must maintain proof of purchasing gold as it may help them file income tax. 

Gold Exchange Traded Fund (ETF)

A Gold ETF is an exchange-traded fund that tracks the price of domestic physical gold. These are known as passive investment options that invest in gold bullion. Gold ETFs represent the physical gold in paper or digital form, which people can store in Demat accounts. Generally, one gold ETF equals 1 gram of gold, and the underlying asset is physical gold. Investing in gold ETF combines the flexibility of the stock investment and the simplicity of investing in gold. They are traded and listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). They can be bought and sold continuously on the stock exchanges, just like a company’s share. At the time of redemption of the gold ETF, you do not get physical gold but receive the cash equivalent. You can easily invest in gold ETF using your Demat account. Gold ETF provides you with direct gold pricing; hence there is complete transparency on the holdings. Moreover, they have lower expenses comparatively.

Digital Gold

Buying digital gold is a virtual method of investing in gold without holding it physically. You can buy it online, invest as low as one rupee, and take physical delivery of gold if you want at your doorstep. You can easily buy or sell your units anytime; it is highly liquid. You can use it as collateral for applying for loans online. You don’t have to bother storing digital gold as one can access with a few clicks on your mobile. One can also exchange for physical gold in jewellery or coins. 

Sovereign Gold Bonds vs Physical Gold vs Gold ETFs vs Digital Gold – A comparison:

Meaning

Sovereign Gold Bonds are securities issued by the RBI denominated in gold.

Physical gold means holding gold physically, which can be purchased from any jeweller.

Gold ETFs track the price of domestic physical gold and are traded in the stock market. 

Digital Gold is a virtual method of investing in gold. 

Lock-in Period

SGBs come with a five year lock-in period and are illiquid.

Physical gold has no lock-in period and is highly liquid. 

Gold ETFs have no lock-in period and can be traded on the stock market on trading days.

Digital gold has no lock-in period and can be purchased or sold whenever required. It is highly liquid.

Minimum Investment

The minimum investment in the case of SGBs is 1 gram. The maximum investment is 4 kgs for individual investors and Hindu Undivided Families (HUF) and up to 20 kgs for trusts and corporations. 

Gold biscuits or coins are available at 10 grams minimum. The minimum investment is on the higher side in physical gold.

An investor has to purchase a minimum of one unit of gold ETF, just like a share of the company, which may differ from one ETF to another.

Digital gold can be purchased for as low as one rupee, the least of all.

Liquidity

SGBs are illiquid, with a maturity period of 8 years and a lock-in period of 5 years.

Physical gold has no lock-in period and can be sold to jewellers whenever required. 

Gold ETFs can be sold quickly on trading days.

Digital gold is highly liquid and can be sold with a few clicks whenever required.

Demat Account

A Demat account is not mandatory for SGBs. Demat accounts allow for digital storage of it.

Physical gold does not require a Demat account.

Gold ETFs require a Demat account as it is listed and traded on the stock exchange.

A Demat account is not mandatory for digital gold.

Final words

Every form of gold has pros and cons; it depends on your investment goals to decide which one to buy. For example, if you are a conservative investor who wants regular interest on investment, you can go for Sovereign Gold Bonds. On the other hand, if you are buying gold for an occasion such as a festival or a wedding, you can go for physical gold, and if you want a liquid form of gold, you can consider investing in gold ETFs or digital gold.

Credit Principal at Wint Wealth

Vaibhav is Chartered Accountant by profession, having experience of 4+ years in banking & finance sector.
Since past one year associated with Wint Wealth as Credit Principal. Previously worked with Northern Arc Capital for 2 years in FI-Credit Team and AU Small Finance Bank for 1 year in LAP-Credit Team.

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

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