Both Gold ETF and Sovereign Gold Bonds (SGB) serve as alternate options to traditional investment in physical gold.
Creation: Gold ETF units are created and backed by mutual funds. The physical gold acquired by the Fund is stored in vaults of custodian banks and works as the underlying from which the units derive value. The Sovereign Gold Bond (SGB) is a product sold by the Reserve Bank of India (RBI), issued on behalf of the Government of India. Furthermore, the redemption money and the interest received by SGBs are protected by a sovereign guarantee.
Demat Account: It is mandatory for investors in Gold ETF to maintain a Demat account. The investor of SGB has an option to hold the bonds either in the paper (certificate of holding) or Demat form, whichever is convenient to him.
Charges: Gold ETFs include no entry or exit charges. But there are three important costs that investors must consider – expense ratio for managing the ETF funds, broker cost, and tracking error (tracking error occurs because of the fund’s expenses and cash holdings, thus not reflecting the actual gold rates). You will also pay brokerage when you buy/sell Sovereign Gold Bonds in the secondary market.
Mode of Payments: Gold ETF can be purchased only through Digital Mode. In the case of SGBs payment can be made by Cheque/DD/Electronic transfer up to Rs.20000/
Discount: No discount available for online purchase in case of Gold ETF. In the case of SGBs Rs 50 discounts per gram are available for online purchase. Investment limit: As an investor, you need to buy a minimum of 1 unit of gold – equal to 1 gram of gold both for SGB and Gold ETF. No maximum limit for buying and selling Gold ETF. In the case of SGB, the maximum investment for HUF & Individuals for subscription is 4 KG in a year for each family member and Trusts and others 20 KG.
Purity: When you deal in Gold ETFs, the purity is assured as the sector is organized and 99.5% purity is the standard. Sovereign Gold Bonds (SGB) is government securities denominated in gold of 999-purity.
Interest: The SGB product offers interest at 2.5% per annum on the actual investment value. Gold ETF does not offer interest on underlying assets.
Lock-in period: No lock-in period for Gold ETF. The tenor of the bond will be for 8 years with an exit option after the 5th year to be exercised on the next interest payment dates.
Trading in stock exchange: Gold ETF is tradable on stock exchanges. Though the tenor of the SGB (bond) is 8 years, early encashment/redemption of the bond is allowed after the fifth year from the date of issue on coupon payment dates. The bond will be tradable on Exchanges if held in demat form. It can also be transferred to any other eligible investor.
Trading volume: Gold ETFs enjoy higher trading volumes compared to SGBs. As opposed to gold ETFs, the trade volume of SGB is low, which hurts the interests of the investors.
Buying procedure: The investor has to authorise payment at the market rate of the day for Gold ETF units through his linked bank account. The units of the gold ETF are credited to his Demat account bought at the market rate. The Sovereign Gold bonds are periodically sold through banks (except small finance banks and payment banks), Stock Holding Corporation of India Ltd (SHCIL), designated post offices, and National Stock Exchange and BSE. The price of SGB is quoted for the bond price per gram of gold is fixed in Indian rupees on the basis of simple average of the closing price of gold (999 purity), on the basis of published by the India Bullion and Jewellers Association Ltd for the last three working days of the week preceding the subscription period.
Loan facility: GOLD ETF can be used as collateral. Investors can also use SGB bonds as collateral against loans.
Tax: The capital gains tax arising on redemption of SGB after maturity has been fully exempted. This exclusive tax benefit is not available in other options like gold ETF, gold funds, or physical gold. Investors may benefit from indexation for Long Term Capital Gain (LTCG) tax if they transfer their bond after 36 months and before it matures. STCG is applicable both for Gold ETF if the assets are disposed-off before 36 months of acquiring.
Redemption: Gold ETFs are tradable on stock exchanges. When you sell your gold ETF on the exchange, you get gold equal to its cash.
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