Physical Gold vs Gold ETFs vs Sovereign Gold Bond

Investing in Physical Gold Vs Gold ETFs Vs Sovereign Gold Bond

Physical Gold

Physical gold is a tangible asset with a finite value available in different physical forms like biscuits, coins, and jewellery. For an individual, ‘sentimental value’ plays a vital role when it comes to physical gold. In fact, throughout history, gold has emerged as an unparalleled form of wealth creation asset.

Advantages of Physical Gold in:

·         Counterparty Risk – When buying physical gold, there is no risk of involvement of any counterparty like banker, broker or any other intermediary.

·         Inherent Value – Many people invest in gold due to its inherent value, since it has an indestructible physical form, cannot counterfeit easily unlike paper money. Also, its scarcity and universal acceptation back up its inherent value.

·         Investment: Buying physical gold has been the most conventional form of investment which could be in the form of jewellery, coins or ingots. Buying gold jewellery gives you the added benefit of using your investment as a stylish accessory. Physical gold investments also give you the benefit of using it as collateral in taking a loan. There is no limit of buying physical gold, however, you should keep track of your gold transactions for income tax reasons. It is an ideal hedge for financial market risks.

·         Lock-in Period: There is no lock-in period of physical gold investments. You can keep it as long as you like.

Disadvantages of Physical Gold in:

·         Resale Value: Being a ‘Tangible asset’, gold is indestructible and difficult to counterfeit, but if you’re buying it solely for investment purpose, you need to be cautious as the resale value of gold jewellery is comparatively lower than gold coins and ingots.

·         Safety Issue: You also need to be careful of the safety factor when it comes to physical gold. It is highly susceptible to theft and burglary. You need to keep it safe at home or pay for a safety locker in a bank to keep it secure.

·         The purity of Gold: When buying gold in physical forms such as jewellery or coins, purity is a major concern since you would need a guarantee that the purchased gold is pure.

·         Storage Cost: Unlike Gold ETFs and Sovereign Gold Bonds, physical gold needs a secure space to be stored  that would cost much giving the worth of the asset.

Gold ETFs

Gold Exchange Traded Funds (ETFs) are funds that are traded in stock exchanges and can be bought and sold during trading sessions. Gold ETF does not have a physical form but is traded almost close to the physical gold price. You can invest in Gold ETFs through the Demat account.

 Advantages of Gold ETFs in:

·         Investment: Unlike physical gold, here, you can buy as small as one gram of gold or as much as you can afford and gradually accumulate it in your account to multiply your investments. There is no upper subscription limit in buying Gold ETFs.

·         Safety: Unlike physical gold, the Gold ETFs are kept in Demat account where they will be more secure than in physical form and less exposed to theft. To maintain your Demat account, you need to pay nominal Demat charges for holding scrips.

·         Tax Benefits: You can buy gold online on reliancesmartmoney.com that offers you multiple gold ETF options. Gold ETF is also eligible for Long-Term Capital Gain (LTCG) at 20%, with indexation, if you hold it for more than three years. 

·         Purity: Purity is not the concern in the case of Gold ETFs since they are held in electronic form and traded near actual gold prices. So, gold ETFs have more transparency than physical gold when it comes to purity.

Disadvantages of Gold ETFs in:

·         Brokerage: The broker charges a cost every time you buy or sell gold ETF units from your Demat account.

·         Unlike physical gold, the gold ETFs cannot use as collateral for taking loans.

·         High expense ratio

You can buy gold online on reliancesmartmoney.com that offers you multiple gold ETF options.

Sovereign Gold Bond

Sovereign Gold Bond (SGB) is a type of gold investment introduced by the government. The gold bonds for investments can be purchased at selected post offices, designated banks, and stock exchanges. The SGBs are issued by the Reserve Bank of India (RBI) and are traded on exchanges.

Advantages of Sovereign Gold Bond (SGB) in:

·         Investment: Like Gold ETFs, you can start investing in Sovereign gold bonds from 1 gram and go up to 4kg. The maximum limit of subscription for trusts and similar entities per fiscal year is 20kg. Investors will be issued with the Holding Certificate under Government of India Stocks under Government Security Act, 2006. The issued bonds can also be converted into Demat form.

·         Taxation: The SGBs comes with a 5 year lock-in period and applicable for long-term capital gain after 3 years. The most lucrative advantage is if you redeem gold after maturity, then no capital gain tax will be applicable.

·         Interest: The Sovereign gold bonds are entitled to a fixed 2.5% interest of invested capital per annum.

·         Purity: Like Gold ETFs, the Sovereign gold bonds are also traded in non-physical form but the prices are linked to the actual price of physical gold.

Disadvantages of Sovereign Gold Bond (SGB) in:

·         Lock-in Period: The lock-in period is a concerning issue with the gold bonds since it comes with a 5-year lock-in period. One can only withdraw from the 5^th year. That made it less idle for short or mid-term investments.

Comparison of Physical Gold, Gold ETFs, and Sovereign Gold Bond

Parameters	Physical Gold	Gold ETFs	Sovereign Gold Bond
Subscription Limit	No limit	Minimum: 1gram Maximum: No limit	Minimum: 1 gram Maximum: 4kg per person & Hindu undivided family (As per rules for SGB 2018-19) and 20kg for trusts and similar entities
Lock-in period	No	No	5 years
Returns	Lower than actual return*	Lower than actual return*	Higher than the actual return
Liquidity/ Tradability	Low**	High	High
Safety & Security	Low (Due to a higher risk of theft  and cheating)	High (Due to low risk of theft and cheating)	High (Due to low risk of theft and cheating)
Long-term Capital Gain (LTCG)	LTCG applicable after 3 years	LTCG applicable after 3 years	LTCG applicable after 3 years (No capital gain tax if held till maturity period)
Acceptance as collateral for loan	Yes	No	No
Purity of Gold	Purity check needed	High (As Gold ETFs held in electronic form)	High (As SGB held in electronic form)
Storage Cost	High	Low	Very Low

Summary:

We Indians always have an emotional side for gold. No matter which salary class we belong or what profession we are involved in, we are always lured to the glitters of gold. To us Indians, it is a status symbol and a commodity of prestige. It is one of the most preferred investment options in India which offers high-liquidity, asset allocation, and hedge against inflation and not to mention status, prestige, and so on.

Buying gold during the Diwali festival is considered auspicious. It is believed that buying gold on ‘Dhanteras’  brings good luck, success, and great prosperity in life. To do so, you don’t have to go to a jeweller or bank to buy jewellry or coins respectively. Instead, you can invest in other alternative gold investment options like gold ETFs and Sovereign gold bonds instead of physical gold. These investment options come with distinctive features that make them a good alternative to physical gold.

Gold is an inflation-beating investment option that offers inflation-adjusted returns over a period of time. Also, gold has an inverse relationship with equity investments that makes it good for portfolio diversification.

One can go for Gold ETFs and Sovereign gold bonds (SGBs) that offer a hassle-free way of investment without storage problems. Gold ETFs are traded in electronic form, hence; there is no risk of theft and cheating. Also, gold ETFs and SGBs offer better liquidity and tradability compared to physical gold since these are traded on the exchange.

When it comes to the tax implications, sovereign gold bond issued by Reserve Bank of India (RBI) gives tax exemption if the bond is held until the maturity period. Also, it offers a 2.5% fixed interest per annum on the invested amount. Similar to Gold ETFs, the SGBs are traded in a non-physical form which makes it more secure and safe than physical gold which is exposed to theft.

As you can see, the Gold ETFs and Sovereign Gold Bonds are worth considering as viable investment option to invest in this festive season. Moreover, these investment options can help you out in diversifying your equity-based portfolio and get the benefit of capital appreciation.

When looking to buy gold this ‘Dhanteras’ you should choose investment options as per your future goals and select the right option on the basis of returns, liquidity, tax benefits, efficiency, etc. Also, it is important to know that every investment has its own set of pros and cons that one should consider while looking for a viable gold investment option. Here, we’ve mentioned various gold investment options – physical gold, Gold ETFs, and Sovereign gold bonds with their advantages and disadvantages that can help you make the right decision in this festive season.

If you do not have a Demat account, you can open one with the reliancesmartmoney.com and begin your investments on this very auspicious the occasion of Diwali with our smart investment platform.