Purchasing gold on Dhanteras, a day ahead of Diwali, is considered auspicious in Indian culture. However, these days individuals are faced with a modern-day dilemma: should they stick with the allure of gold jewellery or venture into buying digital gold? In recent years, an increasing number of individuals have recognised the advantages of digital gold, which include Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds (SGBs), as opposed to holding physical gold in the form of jewellery or coins.
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Both Gold ETFs and SGBs present compelling investment options, particularly due to their cost-effectiveness compared to traditional gold purchases. However, it's important to note that opting for these digital forms of gold means forgoing physical possession of the precious metal.
Here are some key factors to consider when deciding where to invest money today, November 10, on the occasion Dhanteras:
Basic definition
Sovereign Gold Bonds (SGBs) are issued by the Indian government, and investors receive holding certificates. These bonds consist of government securities denominated in gold, and investors are required to pay the issue price in cash. SGBs provide an interest rate of 2.5% on the initial investment, payable half-yearly over an eight-year maturity period.
The market price of these bonds moves in tandem with domestic gold prices.
Gold ETFs, on the other hand, are listed instruments whose market price is linked to domestic gold prices.
Maximum quantity
SGBs have a maximum subscription limit of 4 kg for individuals, 4 kg for Hindu Undivided Families (HUFs), and 20 kg for trusts and similar entities per financial year (April-March). In contrast, there is no specific limit for Gold ETFs, although investors may encounter large bid-ask spreads on the exchange due to low trading volumes.
Tax treatment
Interest from SGBs is taxable based on the investor's income slab. Capital gains on SGBs are tax-exempt if held until maturity, and if exited after 5 years but before maturity, the capital gains are subject to a 20% tax rate with indexation benefit. Gold ETFs, on the other hand, are taxed at 20% with indexation benefit if held for three years or more, and at the marginal tax rate if held for less than three years.
A look at returns
Both Gold ETFs and SGBs are linked to physical gold rates, meaning the capital appreciation benefits are similar. However, SGBs offer an additional benefit of 2.5% interest on the invested value, which can significantly enhance long-term returns.
Historical data shows that several Gold ETFs have delivered annualised returns of over 12% in the last five years.
Here's a look at how SGB performed since the start of FY22:
| FY22 and FY23 | Issue Date | Issue Price (₹) | Current Price (₹) | Returns |
| 2021-22, Series I | May 25, 2021 | 4,777 | 5,926 | 24.05% |
| 2021-22, Series II | June 1, 2021 | 4,842 | 5,926 | 22.39% |
| 2021-22, Series III | June 8, 2021 | 4,889 | 5,926 | 21.21% |
| 2021-22, Series IV | July 20, 2021 | 4,807 | 5,926 | 23.28% |
| 2021-22, Series V | August 17, 2021 | 4,790 | 5,926 | 23.72% |
| 2021-22, Series VI | September 7, 2021 | 4,732 | 5,926 | 25.23% |
| 2021-22, Series VII | November 2, 2021 | 4,761 | 5,926 | 24.47% |
| 2021-22, Series VIII | December 7, 2021 | 4,791 | 5,926 | 23.69% |
| 2021-22, Series IX | January 18, 2022 | 4,786 | 5,926 | 23.82% |
| 2021-22, Series X | March 8, 2022 | 5,109 | 5,926 | 15.99% |
| 2022-23, Series I | June 28, 2022 | 5,091 | 5,926 | 16.40% |
| 2022-23, Series II | August 30, 2022 | 5,197 | 5,926 | 14.03% |
| 2022-23, Series III | December 27, 2022 | 5,409 | 5,926 | 9.56% |
| 2022-23, Series IV | March 14, 2023 | 5,611 | 5,926 | 5.61% |
(Source: RBI)
The above data has used price of SGB for the first issue of FY24 as the benchmark price to calculate returns. The above table shows that had an investor bought gold bonds in any of the tranches in the last 14 issues in FY21 and FY22, he/she would be sitting on profits.
Loan facility
SGBs offer the option for investors to take out loans against their gold holdings, while this facility is not available for Gold ETFs.
Where to invest?
The choice between Sovereign Gold Bonds and Gold ETFs should depend one one's investment goals, risk tolerance, and investment horizon. SGBs stand out with their unique blend of semi-annual interest and maturity amounts, along with better tax efficiency compared to ETFs.
On the other hand, Gold ETFs offer flexibility and the potential for higher returns but come with added costs and tax considerations.
It's imperative to check the objective before buying gold. Additionally, investors should ensure that they don't allocate more than 10% of the total portfolio to gold, whether it's in physical or digital form, as recommended by experts.
(Edited by : Amrita)
First Published: Nov 8, 2023 1:41 PM IST
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