Gold ETF vs Sovereign Gold Bond vs Physical Gold - Explained

There are many options for investors looking to invest in gold. Know the difference between gold ETF, sovereign gold bond & physical gold at IIFL finance.

21 Nov,2022 12:45 IST 11 views
Gold ETF vs Sovereign Gold Bond vs Physical Gold - Explained

Indians have been investing in gold from time immemorial as a safety net. Gold is considered one of the safest assets to ride through business cycles as its value is not impacted much by economic downturns, interest rates or inflation. In fact, prices of gold tend to rise during economic downturns as investors look for safe havens.

Though traditionally most investments in gold went into physical gold, there are other options now for investors looking to invest in gold. These include Gold Exchange-Traded Funds and Sovereign Gold Bonds.

What Are Gold ETFs?

A Gold ETF is an exchange-traded fund that tracks the price of physical gold. In other words, Gold ETFs are units representing physical gold which is in dematerialised form./p>

Gold ETF units are equal to 1 gram of gold and are backed by physical gold. They are listed and traded on the stock exchanges and can be bought and sold just like stocks. When a Gold ETF is redeemed, you get cash equivalent of gold.

The advantages of investing in Gold ETFs are that the purity of gold is guaranteed, there is no fear of theft and saves on safe deposit charges. Gold ETFs are accepted as collateral for loans and there is no entry and exit load when buying or selling the units.

What Are Sovereign Gold Bonds?

Sovereign Gold Bonds were introduced by the government in 2015 to help reduce demand for physical gold by shifting a part of it to investments in bonds.

Sovereign gold bonds are government securities denominated in grams of gold. Investors can buy the bonds, which will be redeemed in cash on maturity. The bonds carry an interest on the initial investment which is paid half-yearly.

It is an alternative to holding gold in physical form with risks and costs of storage eliminated. The minimum investment in the bond is 1 gram and the maximum limit is 4 kg of gold per year for individuals and Hindu Undivided Family.

The main advantage of Sovereign Gold Bonds is that there is no capital gains tax when the bond is redeemed on maturity.

The main disadvantage of Sovereign Gold Bonds is that it is not very easy to liquidate before maturity. The tenor of the bonds is for eight years, though early redemption is allowed after the fifth year. Since the tenor of the Sovereign Gold Bonds is fixed, the investor will have to redeem it at maturity even if he or she has no interest in selling it.

What Is Physical Gold?

Physical gold is the traditional way of holding gold. Though most Indians hold gold in the form of jewellery, it may fetch a slightly lower price than gold coins and bars when sold.

Physical gold forms the benchmark for both Gold ETF and Sovereign Gold Bonds. Gold ETFs are backed by physical gold, while there is no such backing in the case of Sovereign Gold Bonds.

The main advantage of physical gold is that it can be liquidated easily in times of an emergency. Though both Gold ETFs and Sovereign Gold Bonds can be sold in exchanges, the process is not immediate. The physical gold can also be pledged any time to avail gold loans. Though Gold ETFs and Sovereign Gold Bonds are eligible to be used as collateral for loans, most banks and NBFCs do not provide gold loans against them.

Conclusion

No wonder, gold loan is the fastest growing personal loan segment in India. NBFCs like IIFL Finance offer instant gold loans at very attractive terms. IIFL Finance  gold loans come with competitive interest rates and are approved with minimal paperwork through a swift, online process.

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