Sovereign gold bond or gold ETF? What to buy on Dhanteras today?

On the auspicious occasion of Dhanteras today (October 29), if you are inclined to purchase gold digitally and are scouting for the best way out to invest in the precious yellow metal. Here's a quick take by experts on whether you should go for Sovereign Gold Bonds (SGBs) or Gold ETFs. 

For the unversed, while both forms of gold investment are backed by gold, the SGBs or more popularly referred as gold bonds come with a lock-in of 5 years and post that only they can be traded in the secondary market. On the contrary, Gold ETFs offering higher liquidity can be traded at investors' will.

Experts view 

Trivesh D, COO, Tradejini remarked that the choice between Sovereign Gold Bonds (SGBs) and Gold ETFs this Dhanteras hinges on an investor’s objectives, whether for long-term security or short-term liquidity. Gold has consistently shown resilience amid market volatility, with prices hovering around INR 76,000-77,000 per 10 grams on the MCX, slightly below recent highs of INR 78,800 and past peaks of INR 80,000. This range creates a strategic entry point for buyers, especially with Dhanteras season spurring demand.

He added that currently no new SGBs have been issued in recent months, but any upcoming issuance dates would be a positive development for long-term investors. SGBs offer notable advantages, including tax-free capital gains upon maturity and a fixed 2.5 per cent annual interest rate, paid semi-annually. Additionally, investors in SGBs avoid wealth tax, GST, and transaction fees, and they can invest as little as 1 gram up to a maximum of 4 kg for individuals and HUFs or 20 kg for institutions.

Conversely, Gold ETFs, though slightly more costly with expense ratios around 1 per cent and broker fees, provide easier liquidity for active traders. ETF prices closely track gold prices and allow investors to buy in fractional amounts without the long lock-in periods of SGBs. However, capital gains tax applies for both short and long terms, with long-term gains taxed at 12.5% after 36 months.

Ultimately, gold ETFs cater more to those needing liquidity and market access, whereas for those looking at gold purely as an investment, SGBs offer better returns over the long term. Diversifying 10-15 per cent of a portfolio into gold remains a prudent strategy for balancing volatility across asset classes, added Trivesh D.

On the contrary, Shweta Rajani, Head - Mutual Funds, Anand Rathi Wealth advocated investment in mutual fund units as against gold investment to enhance wealth this Dhanteras. This the expert adviced as gold has not consistently outperformed in all five-year timeframes except in the last 5-year bucket, making it less reliable when compared with equity.  Gold has delivered 10 per cent return whereas equity has delivered 14-15 per cent for the  same timeframe with lesser deviation. We suggest that investors deploy 80 per cent of their wealth in equity and 20 per cent in debt as they have low correlation as asset classes and historically the combination has delivered 12 per cent.

However, as Dhanteras is a celebration of wealth, and gold and silver has been the investors' favourite for this festive occasion. Rajani said the best way to take exposure in gold is via SGBs, the government has not launched new tranches in the recent past. Therefore, the next best alternative to invest in gold is via Gold ETFs, as they invest in gold bullion of 99.5 per cent purity. Gold FOFs are less efficient due to the added costs from investing via the FOF mode, added the expert.