Wealth Guide: Gold ETF vs Sovereign Gold Bonds - Pros & Cons and how to select one of them

While discussing the modern options of investment in gold, 2 types of investments emerge as the best options, one being Sovereign Gold Bonds (SGBs) and the other, Gold ETFs. Mahendra Luniya, CEO, Vighnaharta Gold Limited, shares his knowledge on the instruments and their pros and cons to understand the logical reasons to select one of them.

Explaining Sovereign Gold Bonds, Mahendra Luniya says, "SGBs are the bonds issued by RBI, backed by the central government, to encourage investments in digital gold. 1 unit of SGB = 1 gram of gold We can buy them from primary and secondary markets. They provide an interest of 2.5% p.a. To summarize, it’s an option to invest in gold digitally along with earning a passive income on the investment. It’s safe, liquid and we save on the making charges and GST which we would otherwise incur on physical gold purchases."

Explaining Gold ETFs, Luniya adds, "An ETF’s an exchange traded mutual fund. Since it is a Gold ETF the underlying here is gold. Issued by fund houses, it’s a medium to buy gold in small quantities. It is regulated by SEBI ensuring the safety aspect. One of the most important advantages of this product is that it is budget friendly. Gold ETFs also save the making and GST charges that physical gold attracts."

Further, he explained how to select the better option between Gold ETF vs SGBs.

Interest Income: 

"SGBs come with a 2.5% p.a. passive income stream which is not the case with Gold ETFs, thus on the income front, we will earn a higher return with SGBs in the portfolio," he said.

Liquidity: 

"The ticket size of the two products varies, and so does the knowledge about the products. Though they are exchange traded, SGBs are not a very popular investment instrument, which reduces the liquidity on a comparative note," he added.

Safety: 

"Both the instruments stand on strong security parameters, but since SGBs are directly backed by the Government of India, the safety of the instrument is unquestionable. Thus, with the above points, it is clear that SGBs stand to be the best option for investing in the gold product digitally. One should ensure off-loading a large portfolio in partial terms instead of selling it upfront as it might hurt the sales price," he concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)