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SGB, ETF, MF, or physical gold: Which is the best way to invest in gold?
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5 min read | Updated on May 07, 2024, 19:45 IST
SUMMARY
Gold has seen a strong rally in the last few years, rising ~25% in calendar year 2023 and ~12% in 2024 (in INR terms). This explains the sudden rise in interest in gold as an investment option.
SGBs are a superior investment option as compared to traditional gold investment methods
Indians love gold! Since childhood, we are taught to “invest” in gold as a safe way to earn returns. This raises the question: Is there one way to invest in the yellow metal that is better than the others? One that is safe and less cumbersome than physically storing it and with minimal charges? Oh and of course, one that offers some tax benefits? Read on to find out more.
Gold has seen a strong rally in the last few years, rising ~25% in calendar year 2023 and ~12% in 2024 (in INR terms). This explains the sudden rise in interest in gold as an investment option.
If you're considering investing in gold, there are various options available.
However, one option stands out: Sovereign Gold Bonds (SGBs).
Why? For these reasons:
- 2.5% annual interest (paid semi-annually)
- No GST on purchase
- No capital gains tax on redemption if held till maturity
- No making charges
- No holding charges like locker charges on physical gold.
The table below helps you compare SGBs to traditional gold investment methods. Later, we will also analyse the return potential of each method.
Let’s see how SGBs stack up.
Methods of gold investment and their features
| Physical Gold | Gold MFs | Gold ETFs | SGBs | |
|---|---|---|---|---|
| What are they? | Tangible gold that includes coins, bars, jewellery, etc. | Mutual funds that invest in gold-related assets | Exchange-traded funds that track the price of gold | Government securities denominated in grams of gold |
| Where do they invest? | NA | Gold ETFs or physical gold, stocks of gold companies | Physical gold of very high purity | NA |
| Who issues them? | NA | Mutual fund AMCs | Mutual fund AMCs | RBI on behalf of the GOI |
| Costs associated | Storage, insurance, GST; making charges for jewellery | Exit load, wherever applicable | Brokerage fees & demat charges | NA |
| Interest / Regular income? | NA | NA | NA | 2.5% p.a. |
| Can you use them as collateral? | Yes | Yes | Yes | Yes |
| How are they taxed for an investor? | If sold within 3 years: STCG as per slab rate Otherwise LTCG at 20% with indexation Also attracts a 3% GST at purchase | Regardless of period of holding, always taxed as STCG as per applicable slab rate* | Regardless of period of holding, always taxed as STCG as per applicable slab rate* | Interest: taxable at slab rate Capital gains: Exempt, if held till maturity Otherwise as STCG/LTCG based on period of holding similar to physical gold |
| Liquidity | Liquid, but participants must be aware of potential quality issues | Easily redeemable | Liquid since traded on exchanges | Traded on stock exchanges but price discovery is a challenge |
| Can you SIP? | No | Yes | No | No |
*For purchases after 31st March 2023. Prior to that, if sold within 3 years, accrues STCG and is taxed at slab rates. If sold after 3 years, accrued LTCG taxes at 20% with indexation
Comparison of cost of investment and returns net returns generated
| Physical Gold | Gold ETFs/MFs | SGBs | |
|---|---|---|---|
| Starting investment | ₹1,00,000 | ₹1,00,000 | ₹1,00,000 |
| Add: GST @3% | ₹3,000 | NA | NA |
| Add: Locker charges, say ₹1,500 p.a., for 8 years | ₹12,000 | NA | NA |
| Total Investment | ₹1,15,000 | ₹1,00,000 | ₹1,00,000 |
| Maturity value (assuming 11% CAGR) on starting investment | ₹2,30,450 | ₹2,30,450 | ₹2,30,450 |
| Add: Interest | NA | NA | ₹20,000 |
| Less: Expense ratio (0.5% p.a.) assumed on initial value | NA | ₹4,000 | NIL |
| Pre-tax profit | ₹1,15,450 | ₹1,26,450 | ₹1,50,450 |
| Less: Income-tax assuming indexation at 7% and STCG in case of ETFs | ₹10,700 | ₹37,935 | ₹0 |
| Post tax net profit; annualised return on total investment | ₹1,02,705; 8.85% | ₹88,515;8.25% | ₹1,50,450;12.16% |
Is there any catch?
Yes, there is one thing to be aware of. SGBs come with an 8-year lock-in, with an option to exit after the fifth year.
But as we discussed earlier, SGBs are tradeable on exchanges!
Let us clarify: If you can find a counterparty, you can trade them on the markets anytime. However, if you want to sell it back to the RBI, you can only do so after five years. Keep in mind that if you want to realise the tax benefits, you need to stay invested for the entire duration of eight years.
Conclusion
We hope this helps you decide on the best way to invest in gold. While physical gold has utility, as an investment it comes with its own baggage. Given the many advantages SGBs have over other investment methods, they can be considered a lucrative yet safe investment option.
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