Gold holds a significant cultural and economic position in India, symbolising wealth, prosperity, and tradition. It's widely used in jewellery, festivals, and weddings, driving a substantial portion of the global gold market. Beyond physical gold, Indians are increasingly investing in paper gold—financial instruments like gold ETFs, Sovereign Gold Bonds, and digital gold. Paper gold provides a convenient, secure, and cost-effective way to invest in gold without the hassles of storage and security, allowing investors to benefit from gold's value appreciation while diversifying their portfolios.

What is a Gold ETF?

A Gold Exchange-Traded Fund (ETF) is a type of investment fund that aims to track the price of gold. It is traded on stock exchanges, similar to stocks, and allows investors to gain exposure to gold without having to physically own the metal. Gold ETFs invest in gold bullion and closely follow gold prices, making them a convenient and cost-effective way to invest in gold. These funds offer liquidity, transparency, and the ability to buy and sell during market hours. Additionally, Gold ETFs eliminate the need for storage and security concerns associated with holding physical gold, making them an attractive option for investors looking to diversify their portfolios with precious metals.

What is an (SGB) Sovereign Gold Bond?

A Sovereign Gold Bond (SGB) is a government-backed security issued by the Reserve Bank of India (RBI) on behalf of the Indian government. These bonds are denominated in grams of gold and offer investors a way to invest in gold without holding the physical asset. SGBs provide a fixed interest rate, usually paid semi-annually, in addition to the potential for capital appreciation based on the price of gold. They have a tenure of eight years, with an option to exit after the fifth year. SGBs are a safe investment, as they are backed by the government, and they provide an alternative to physical gold, offering the benefits of gold investment without storage or security concerns.

Understanding the difference between SGB and gold ETF
 

Benefits of investing in SGB vs gold ETF

Investing in Sovereign Gold Bonds (SGBs) and Gold ETFs both offer unique benefits. SGBs provide the dual advantage of a fixed interest income and potential capital appreciation. The government backing of SGBs ensures security, and if held until maturity, they are exempt from capital gains tax, making them a tax-efficient option. On the other hand, Gold ETFs offer high liquidity, as they can be traded on stock exchanges during market hours. ETFs do not require a fixed investment period, allowing investors more flexibility. Additionally, Gold ETFs eliminate the concerns of physical storage and security, providing a hassle-free way to invest in gold. Both investment options cater to different investor needs, with SGBs being suitable for long-term, secure investments, and Gold ETFs for those seeking liquidity and flexibility.

How to Invest in Gold: SGB vs Gold ETF

Investing in gold can be done through Sovereign Gold Bonds (SGBs) or Gold ETFs. To invest in SGBs, individuals can purchase them through banks, post offices, or online platforms during the issuance period announced by the government. SGBs require a minimum investment of one gram of gold and offer a fixed interest rate. For Gold ETFs, investors need a Demat account and can buy units through stock exchanges during trading hours. ETFs allow for smaller investments, equivalent to the price of one gram of gold per unit. Both options eliminate the need for physical gold storage, but SGBs provide a fixed tenure and interest income, while Gold ETFs offer liquidity and flexibility for trading.

Gold loans: Can you use SGB or gold ETF?

Gold loans, commonly known as loans against gold, are typically secured by physical gold jewellery or coins. However, it is possible to use Sovereign Gold Bonds (SGBs) as collateral for a gold loan. Banks and financial institutions accept SGBs due to their government backing and fixed-interest income. On the other hand, Gold ETFs are generally not accepted as collateral for gold loans because they are market-linked securities and lack the fixed return and security offered by SGBs. When considering a gold loan, it is essential to compare the gold loan rate and terms provided by different lenders to ensure the best deal for your financial needs.

Tax implications: SGB vs Gold ETF

The tax implications of investing in Sovereign Gold Bonds (SGBs) and Gold ETFs differ significantly. For SGBs, the interest earned is taxable as per the investor's income tax slab. However, if the bonds are held until maturity, the capital gains are exempt from tax. On the other hand, Gold ETFs are subject to capital gains tax. Short-term capital gains (for holdings under three years) are taxed as per the investor's income tax slab, while long-term capital gains (for holdings over three years) attract a 20% tax with indexation benefits. Investors must consider these tax implications when choosing between SGBs and Gold ETFs to optimise their returns.