Sovereign Gold Bond vs Gold ETF vs Gold Fund – Things to know before investing

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Gold prices are touching a eight-month low and are at around Rs 48,000. But whether the prices are up or down gold is one commodity which always manages to garner interest. People always want to know if to invest or not to invest? With the launch of new series of Sovereign Gold bonds,  as an investor you may want to weigh the pros cons of the various forms of electronic gold.

How do they differ?

The three ways of investment in electronic gold are sovereign gold bonds (SGB), gold exchange traded funds and gold funds. Let’s understand what is best suited for you.

Sovereign Gold Bond- These bonds are launched by Reserve Bank of India. The RBI launched the twelfth tranche of SGB priced at Rs 4,662/gm on March 1. SGB gives investor an annual interest of 2.5% and market value of the gold at the time of redemption.

Gold ETFs – They are listed in the stock market just like any company stock. They can be bought and sold at market prices and you can start investing by opening a demat account.

Gold Funds – If you don’t have a demat account but want to invest in gold, then Gold funds is the right answer for you. These funds invest in gold ETFs and are offered by mutual funds.

How should an Investor choose?

With SGBs,  you lock your money for a long term, though they can be sold in the secondary market after the fifth year but on liquidity front SGBs pose a challenge. FinFix founder Prableen Bajpai feels that “While SGBs come with the benefit of capital gains exemption if held till maturity and an interest component, there are some drawbacks in terms of exit options and one time buying at high prices. In addition to SGBs, mutual funds can offer an easy and more convenient way to invest in gold especially by way of SIP where in an investor can even allocate ₹1,000 on a monthly basis. While gold mutual funds offer flexibility to increase, decrease or pause SIP amount, and an easy exit, they are subject to capital gains. Investors should choose a product based on their needs.”

Rising US treasury yield and signs of recovery from pandemic is dragging the gold prices. Anuj Gupta, DVP of Angel Broking said when gold prices are seeing a downward trend, it’s the right time for new investors to buy gold ETFs and going by the track record gold ETF in last one year has given a return of 27.50%.

Pankaj Mathpal of Optima Money Manager said whichever form of gold you invest in, the profit is only possible if the selling price of gold is higher than the purchase price. Investing through an SIP route or averaging cost by investing regularly in a staggered manner can help generating better returns.

While choosing the electronic form of gold you must always be ready to deal with the price fall and the only way to counter that is that your investment must be for a long term horizon.