Comparison Between Gold ETFs, Gold Savings Funds, and Sovereign Gold Bonds
Gold has always been considered a valuable asset, and with modern investment tools, people can now invest in gold without buying physical gold. Today, they can choose from three primary options: Sovereign Gold Bonds (SGBs), Gold Exchange-Traded Funds (ETFs), and Gold Mutual Funds (MFs). Let’s explore each option to help you decide which best suits your investment needs.
Sovereign Gold Bonds (SGBs)
The Reserve Bank of India (RBI) issues government-backed Sovereign Gold Bonds (SGBs) and offers a fixed interest rate of 2.5% per annum, paid semi-annually. These bonds appreciate in value as gold prices rise because they are linked to the price of gold. One of the significant advantages of SGBs is their tax efficiency. If held to maturity, the capital gains are tax-free. However, SGBs come with an 8-year fixed tenure with a lock-in period of 5 years, and you can sell them in the secondary market only after this period. This makes SGBs suitable for long-term investors who are looking for stability and tax benefits.
Note: Currently, SGB is discountinued by Government.
Gold Exchange-Traded Funds (ETFs)
Gold ETFs trade on stock exchanges as open-ended funds, with each unit representing a specific amount of physical gold. They offer high liquidity, allowing investors to buy or sell them anytime during market hours, making them more flexible than SGBs. They provide a direct way to track the price of gold, with returns based on gold’s market fluctuations. They are ideal for investors who want exposure to gold but need flexibility in managing their investments.
Some Gold ETFs examples are SBI Gold ETF, Kotak Gold ETF, Quantum Gold Fund
Gold Mutual Funds (MFs)
Gold Mutual Funds invest in a diversified portfolio of gold-related assets, including shares of gold mining companies or physical gold. These funds pool money from multiple investors and are professionally managed. They are ideal for investors who want exposure to gold but do not have the expertise to manage investments themselves. The returns from Gold MFs depend not only on the price of gold but also on the performance of the underlying gold-related stocks. These funds may carry a moderate level of risk due to their exposure to the stock market.
Some Gold MFs examples are ICICI Prudential Regular Gold Savings (FOF) Fund, Nippon India Gold Savings Fund, Quantum Gold Savings Fund.
Comparison Table: SGBs, Gold ETFs, and Gold MFs
| Feature | Sovereign Gold Bonds (SGBs) |
Gold ETFs | Gold Mutual Funds (MFs) |
| Investment Type | Issued by the Government of India, backed by gold |
Physical gold kept in insured vaults |
Invest in Gold ETFs |
| Rate of Interest | 2.5% p.a. (fixed), paid semi-annually |
None | None |
| Government Backing | Yes | No | No |
| Portfolio Allocation | 100% in Gold | 90-100% Gold, 0-10% Debt | 95-100% in Gold ETFs, 0-5% Cash |
| Gold Purity | 0.999 (Highest quality) | 0.995 (High quality) | 0.995 (High quality) |
| How to Purchase | Through banks, post offices, or online |
Requires Demat account | Through mutual fund account or Demat |
| Minimum Investment | Minimum 1 unit (1 gm of gold), max 4 kg per individual |
Minimum 1 unit (1 gm of Gold) | Minimum ₹5000 |
| Availability Period | Can be subscribed only during specific series |
It can be bought anytime | It can be bought anytime |
| SIP Facility | Not applicable | Mostly not allowed | Allowed |
| Market Listing | Listed on exchanges but with low liquidity |
Yes, on Stock Exchanges | Not listed |
| Lock-in Duration | 8 years lock-in, early exit after 5 years allowed |
None | No lock-in, but exit load of up to 1% for redemptions within 1 year |
| Associated Charges | No charges, government bears all expenses |
Expense ratio up to 1%, brokerage charges |
Up to 0.3% (Fund management charge)+ ETF charges |
| Loan Eligibility | Loan can be availed against SGB | Not available | Not available |
| Liquidity Level | Moderate (after 5 years) | High (can be traded anytime) | High (redeemable on demand) |
| Investment Risk | Low | Moderate | Moderate |
| Returns/ Interest |
2.5% fixed interest + gold price increase |
Based on gold price fluctuations | Based on gold price and stock performance |
Taxation Rules for Gold Mutual Funds
Short-Term Capital Gains (STCG):
- Old Rule:
- Gains on units sold within 3 years were taxed as per income tax slab rates.
- New Rule:
- For units bought between April 1, 2023, and March 31, 2025, slab rates apply regardless of holding period.
- From April 1, 2025, units held for up to 2 years are STCG; gains for 2–3 years are LTCG.
Long-Term Capital Gains (LTCG):
- Old Rule:
- Units sold after 3 years were taxed at 20% with indexation (if bought before March 31, 2023).
- New Rule:
- For units bought between April 1, 2023, and March 31, 2025, gains are taxed at slab rates.
- For units bought after March 31, 2025, LTCG (2+ years) is taxed at 5% without indexation.
Conclusion:
- Sovereign Gold Bonds (SGB): Best for long-term investors, offering fixed interest, tax benefits, and government-backed security, but with a longer lock-in period.
- Gold ETFs: Easy to trade, low costs, but no interest and subject to market fluctuations.
- Gold Funds: Investors can buy Gold ETFs through mutual fund accounts, making them suitable for long-term investments.
SGBs are the best option if you are looking for a gold investment that provides extra benefits such as interest and tax efficiency.
