Preference order to buy Gold for investment purposes:
GOIs Sovereign Gold Bond (SGB) > Gold ETF > Physical Gold
Why Physical gold is the worst
- Making charges: even coins and bars have some making charge
Questionable purity - you can never be cent present sure that you are buying 99.9% purity
- Storage issue: have to take a locker and pay locker rent. Lockers are not easy to get now. Most bankers insist of buying a ULIP product or booking a FD to avail locker facility.
- Theft: believe it or not the present generation is not as careful as the previous. We lose things very easily. It is not uncommon for people (especially millennials) to lose their jewellery. I have known multiple people who have lost their engagement rings!
Where SGB win over ETF
- Sovereign Guarantee- SGBs are backed by guarantee by the GOI. That’s not the case with ETFs which are issued by private companies
- Fixed Returns: The prices of both the SGB and Gold ETF are market linked but SGBs provide you a fixed interest payment of 2.50% paid half yearly. Over years this becomes significant amount.
- Preferred Taxation: SGBs are exempt from capital gains tax. But ETFs have STCG of your tax slab if sold before 3y and LTCG of 20% on indexed cost if sold after 3y
- Annual Charges: Gold ETFs charge approx 1.5% as annual management fee. This is not charged by SGB.
Some Disadvantages of SGB vs ETF
- Availability: Not available to buy everytime. But Govt keeps issuing new trance pretty much regularly.
- Liquidity: Both SGBs and ETFs are listed on the exchange and hence investors can sell them before maturity if they want. This sale happens at market prices. However SGBs have lower liquidity and hence higher bid ask spread
Overall SGB is the best option for investing in Gold. Versus ETFs the returns will be better by approx 4% per year - 2.5% interest and 1.5% annual maintenance charge.