Sovereign Gold Bonds vs Gold ETFs: Which one offers better returns?

Investors prefer investing in gold due to secure return and growth potential. Sovereign Gold Bonds (SGBs) and Gold Exchange-Traded Funds (ETFs) have become two preferred choices among investors who are looking for investment avenues other than physical gold.  While both of these instruments can help investors purchase gold without holding the yellow metal in physical form, there are a few factors the investors should consider before choosing the right investment instrument.

What are Sovereign Gold Bonds (SBGs)?

Sovereign Gold Bonds are securities issued by the Reserve Bank of India on the behalf of the Central government. This means that the RBI and the government undertake the responsibility to repay and honour the bond when it comes to maturity. This year the RBI had launched the Sovereign Gold Bond Scheme 2023-24 - Series I, with an issue price of Rs 5,926 per gram of gold. There was a Rs 50 discount for online subscribers. The latest trance of Sovereign Gold Bond opens for subscription on Monday, September 11. The subscription for Sovereign Gold Bond Scheme 2023-24 - Series II will end on September 15.

SGBs stand out because they can earn investors 2.5 per cent semi-annual interest. This makes SGBs a way to generate a steady income stream. When it comes to taxation, SGBs hold a significant edge over other gold investment options as well. SGBs are also traded on stock exchanges and it can be brought on NSE and BSE. They also come with the added bonus of not incurring any additional management expenses.

What about Gold ETFs?

Gold Exchange-Traded Funds (ETFs) represents a passive investment vehicle that mirrors the domestic physical gold price. Each ETF unit corresponds to one gram of high-purity physical gold and is traded on stock exchanges much like regular shares. Gold ETFs offer the potential for considerably higher returns, particularly in terms of capital appreciation. Notable Indian Gold ETFs like SBI Mutual Fund - SBI Gold ETF and Axis Gold Exchange Traded Fund have shown their prowess by delivering impressive returns of approximately 12 per cent over the past three years. It's worth noting that Gold ETFs come with ancillary costs such as management fees and potential exit loads, factors that could erode returns.

SGBs vs Gold ETF: Which one to choose?

Ultimately, the choice between Sovereign Gold Bonds and Gold ETFs pivots on your investment goals, risk tolerance, and investment horizon. SGBs shine with their distinctive blend of the 2.5 per cent semi-annual interest and the maturity amount that accrues to investors at the scheme's culmination. In addition, SGBs offer better tax efficiency compared to ETFs. On the other hand, Gold ETFs offer flexibility and the promise of higher returns but carry the baggage of additional costs and tax considerations.