SGB, gold ETF, physical gold or gold-related stocks? Know the key difference before buying | WATCH VIDEO

The Sovereign Gold Bond (SGB) scheme, a government-backed investment opportunity linked to the market price of gold, has opened for subscription from June 19 and will be available till June 23. These bonds are issued by the Reserve Bank of India and are available at Rs 5,926 per unit, with each unit equating to one gram of gold. Investors can look forward to a second tranche in September. 

There is a discount of Rs 50 per unit applicable only for those investing in gold bonds through digital mode. This means, these buyers will have to pay Rs 5,876 per unit.

With a maturity period of eight years and a premature exit option after five years, SGBs offer a viable gold investment route for resident individuals, Hindu undivided families (HUFs), trusts, universities, and charitable institutions. In addition to market-linked returns, these bonds yield an interest rate of 2.5 per cent per annum, payable semi-annually. The current economic climate and predictions for gold prices make it an opportune moment to consider investing in SGBs.

Investing in gold can serve as a safe haven during uncertain times, and there are a variety of ways to invest in this precious metal, each with its own advantages and drawbacks. Here are the main ways to invest in gold:

Physical Gold

The most direct way to invest in gold is to buy it in its physical form. This could mean purchasing gold bars or coins from a dealer. The advantage of this method is that you own the actual gold, which could be used as currency in a crisis situation. However, there are also drawbacks to owning physical gold. You must securely store it, which might involve purchasing a safe or renting a safety deposit box, both of which incur extra costs. Also, physical gold does not produce dividends or interest.

Gold ETFs (Exchange-Traded Funds)

Gold ETFs are funds that track the price of gold. They allow you to invest in gold without having to store physical gold. Gold ETFs are easy to buy and sell, as they are traded on exchanges just like stocks. They offer a liquid and convenient way to gain exposure to the price of gold, without the hassle of storing and insuring physical gold. Like all ETFs, gold ETFs come with management fees, which can eat into your returns.

Gold Mining Stocks

Investing in gold mining companies is another way to get exposure to the price of gold. If the price of gold rises, these companies become more profitable, which can cause their stock price to rise. This is a more indirect way to invest in gold, and there are additional risks compared to owning physical gold or gold ETFs. These risks include management risk, operational risk, and the risk of nationalization in countries with unstable political systems.

Gold Mutual Funds

 Gold mutual funds are actively managed funds that invest in a variety of gold-related assets. This can include physical gold, gold ETFs, and stocks of gold mining companies. The main advantage of gold mutual funds is that they offer diversification, which can reduce risk. Gold mutual funds also come with management fees. The performance of gold mutual funds relies on the skill of the fund manager, adding an additional layer of risk.

Gold Derivatives

Gold derivatives are financial contracts that derive their value from the price of gold. These can include gold futures, options, and forward contracts. Gold futures are contracts to buy or sell a specific amount of gold at a predetermined price at a set date in the future. They allow investors to speculate on the future price of gold, providing potential for significant profits if they can correctly anticipate price movements. Gold futures also carry high risks due to the leverage involved, and potential losses can be substantial. Furthermore, gold futures require a fair amount of expertise to trade effectively and may not be suitable for novice investors.

Gold options give investors the right (but not the obligation) to buy or sell gold at a specific price before a certain date. This gives investors more flexibility than futures, as they can choose whether or not to exercise their option depending on the current price of gold. Though, the premium paid for this flexibility can be expensive, and the full investment can be lost if the option expires worthless.

Forward contracts are similar to futures but are private agreements between two parties and are not traded on an exchange. They can be customised to fit specific requirements, but this lack of standardisation makes them less liquid and more prone to counterparty risk.

Gold Funds of Funds

Gold funds of funds (FoFs) are mutual funds that invest in other gold funds, rather than directly investing in gold. They offer diversification as they spread investments across multiple funds, which can potentially decrease risk. A gold FoF might invest in a combination of gold ETFs, mutual funds that invest in gold mining companies, and other gold-related funds. This allows investors to gain exposure to various aspects of the gold market through a single investment.

The main advantage of gold FoFs is that they offer a diversified exposure to gold, which can reduce risk compared to investing in a single gold ETF or mutual fund. They typically have higher fees than other gold investment options, as investors must pay both the FoF's management fees and the fees of the underlying funds.