Sovereign Gold Bonds (SGB) vs. Physical Gold: Which is Better?
Gold is considered one of the most valuable commodities in India, not just economically but also for cultural reasons. Gold ornaments are significant on auspicious occasions, such as weddings, worship, and various other ceremonies.
However, if you are considering buying gold purely from an investment point of view, you should consider investing in digital gold or Sovereign Gold Bonds (SGBs) offered by the RBI. This article will compare SGB vs. physical gold and determine which is more beneficial.
- Physical gold is more favourable than SGB in terms of liquidity because physical gold can be sold at any time, but SGB comes with a five-year lock-in period.
- SGBs have a sovereign guarantee, require no storage cost, and offer a 2.5% interest, while physical gold comes with an additional storage cost.
- SGBs are safer as there is no threat of stealing a sovereign gold bond, while physical gold always comes with a theft risk.
- Physical gold has no limit for investment and is easily available, while SGBs come with a limit of investment and are not easily available.
SGB vs Physical Gold: Quick Comparison
Sovereign Gold Bonds
Type of Ownership
|It can be owned in both paper and electronic format. Certificates serve as proof of investment.||Can be purchased in the form of bars, coins, ornaments, and biscuits. A receipt is provided for every purchase.|
|Prices||The Indian government determines the issue dates, however prices are market driven, the government takes the last 3 days average price.||Prices are volatile and vary from time to time (market-dependent).|
|Liquidity||Liquidity available in the secondary market is very less and redemption can be done after 5 years.||It is easy to liquidate as it can be sold anytime in a jewellery store.|
|Investment tenure||The tenure is fixed at eight years by the RBI.||There is no fixed tenure for investment.|
Redemption can be done after 5 year, however, you can sell in the secondary market if demand is available.
|There is no lock-in period.|
|Rate of interest|
The interest rate is fixed at 2.5% per annum, and interest is paid on a half-yearly basis.
|The interest is not offered for investment in physical gold. Returns depend on the increase in gold prices.|
|Demat account||Having a demat account is not mandatory. But if you buy SGBs online, you must hold the units in a demat account.||There’s no requirement for a demat account.|
Understanding Sovereign Gold Bonds
Sovereign gold bonds (SGBs) are debt securities or bonds issued by the RBI on behalf of the Indian government. The government decides the issue dates of these bonds. These bonds are released based on units. Each unit represents one gram of gold.
The minimum investment in SGB is one gram. However, the maximum investment depends on the category of the investor. For individual investors and Hindu Undivided Families (HUFs), the maximum limit is 4 kg and for private trusts and other organisations, the limit is 20 kg.
Read More: Sovereign Gold Bond Scheme- Things to Know
In simple words, the sovereign gold bond is gold you own in the form of paper. You get a certificate once you purchase a gold bond. You can buy SGBs from branches of nationalised banks, private and foreign banks, stock exchanges, and post offices. Moreover, you can also purchase these bonds online.
Benefits of investing in SGBs
Safety and Security
SGBs are not associated with market conditions. So, they offer guaranteed returns. The interest rate is fixed at 2.5% annually per the RBI guidelines. The interest is paid on a half-yearly basis. Notably, this interest rate exceeds the gains/losses from gold price appreciation/depreciation.
Investing in Sovereign Gold Bonds is also safer than investing in physical gold. When comparing SGB vs. physical gold, you need not protect your SGBs from burglary/theft since you only get a paper certificate, as opposed to physical gold.
Suitable for long-term investment
SGBs have a tenure of eight years from the date of issue. So, if you want a long-term investment with guaranteed returns, you should consider investing in SGBs. In addition, premature redemption is allowed after five years, and you can also sell in the secondary market if liquidity is needed.
Ease of investment
You can invest in SGBs through online platforms as well as offline. The official websites and apps of nationalised and private banks and stock exchanges offer the facility of online account opening and investment.
Collateral for availing of a loan
SGBs can be used as collateral for availing loans. You can avail of loans based on the “loan to value” ratio set by respective banks.
Also Read: How to Take a Loan Against PF?
Disadvantages of investing in SGB
Difficulty in liquidating
SGBs have a lock-in period of five years. It means you will not be able to redeem, transfer, or sell SGBs before the completion of five years from the date of issue. Moreover, if you need money urgently before the completion of five years, you cannot liquidate these investments. When comparing SGB vs. physical gold, this is a disadvantage as physical gold can be liquidated into cash anytime. Also, there is a lag of one day between the application for redemption of SGBS and the credit in the account for most banks. SGBs are available for trade in the secondary market. However, the liquidity available in the secondary market is very low.
Impact of gold prices
If the gold price plummets, there is a possibility that you may suffer losses. Though the number of units remains the same, the volatility in the price of gold impacts the returns. Moreover, redemption on the maturity date involves volatility in returns. The closing price depends upon the average cost of gold for the last three business days before the maturity date.
Understanding Investment in Physical Gold
You can purchase physical gold through bars, jewellery, coins, biscuits, and other physical forms. Starting from the minimum weight of one gram, you can purchase, store, and sell unlimited gold in India. You can purchase gold based on purity from any jeweller in your area.
Nowadays, you can also purchase gold through online platforms and the official websites of reputable jewellers. As you weigh various factors in the comparison of SGB vs physical gold, one of the differentiating factors is the lack of involvement of a broker or third party when it comes to investing in physical gold. So, you have complete control over the investment process. There are many benefits to owning physical gold.
Read More: The Reasons Behind Gold Rates Fluctuation
Benefits of investing in physical gold
Ease of purchasing
You can visit the jewellery store in your area, determine the purity and price, state the weight, and purchase gold directly. You must submit ID proof if you purchase physical gold in large quantities. Moreover, you can pay through various payment options such as cash, cheque, debit or credit card or UPI to purchase physical gold.
Investment in physical gold is favourable in terms of liquidity. Suppose you need money urgently for any purpose, such as a medical emergency, paying educational fees, or recovering from business losses, you can sell the physical gold and avail the payment of the sold gold immediately as per the market price for the day.
Complete control over investment
If you find that the gold price has significantly risen above your purchase price and reached its peak, you can sell it immediately and book a profit. This way, you get complete control and flexibility if you invest in physical gold.
Disadvantages of investing in physical gold
Difficulties related to storage and security
With the ownership of physical gold comes great responsibility for storage and security. There is always a risk of theft or burglary. If you purchase a large amount of gold, you must store it securely in your home and keep it away from prying eyes.
Losses while selling
When you purchase a gold ornament, you must pay the “making charges” and the cost of gold based on the total weight. However, while selling, you only get the price based on the weight. You will not be compensated for making charges.
No interest paid
You do not earn any interest on the physical gold you own. The profit entirely depends upon the increase in gold prices over time. Moreover, there is also the possibility of a decrease in prices over time. In this case, if you compare sovereign gold bonds and physical gold, you will get a fixed interest rate of 2.5% if you invest in sovereign gold bonds at any time.
Also Read: Sovereign Gold Bond Scheme– Things to Know
Also Read: Learn How to Buy Sovereign Gold Bond
Gold will always remain one of the most important commodities in Indian culture and the principal commodity of global trade. If you are considering diversifying your investment portfolio, you should invest in gold. While deciding between SGB vs physical gold, you must consider your financial goals and weigh the pros and cons of each investment type.
Is physical gold suitable for long-term investment?
If you plan to invest for the long term, investing in Sovereign Gold Bonds (SGBs) makes more sense as you earn an additional 2.5% interest rate on SGBs. Moreover, there is no hassle of protecting your investment from theft/burglary.
What is the maximum limit for SGB investments?
For individuals and Hindu Undivided Families (HUF), the maximum limit for SGB investment is 4 kilograms. However, it is 20 kilograms for entities such as trusts, organisations, and corporations.
Who are the authorised agencies that can sell SGBs?
Nationalised banks, private and foreign banks, stock exchanges, and post offices are authorised agencies that can sell SGBs.
What should I check before buying physical gold?
You should check the purity level, price per gram, certifications, and other additional charges while purchasing physical gold.
Which is the more favourable investment when comparing SGB vs physical gold on a liquidity basis?
When it comes to liquidity, physical gold investment is favourable. Because you can sell physical gold at any time. However, SGBs come with a five-year lock-in period. You can trade or transfer SGBs only after the completion of five years from the issue date.
Why are gold bonds better than physical gold?
It is because they do away with the dangers and expenses related to storage, purity, and making fees that are common when storing physical gold. Along with the potential increase in the value of the gold, they frequently offer a fixed interest rate that guarantees a little annual income.
Is digital gold better than physical gold in India?
Due to its convenience, lack of difficulties with purity and charging, and safety against theft, digital gold has been preferred over actual gold in India. It also provides simple transactions and the choice of being converted into actual gold at the moment of redemption.
Is physical gold tax-free?
Not in all places. When sold, the asset is liable to capital gains tax, and the amount of tax due can vary depending on how long the item was kept; owning it for a longer time may occasionally result in a lower tax rate.
What is the TDS on digital gold?
If you intend to purchase digital gold, you should be aware that it is subject to taxation by the income tax regulations for gold purchases. Similar to actual gold and paper gold, the tax on digital gold will be 20.8%.