Sovereign Gold Bonds or Gold ETFs: What should you buy this Diwali?

This Diwali, if you are contemplating investing into gold, then remember that you do not necessarily have to buy it in the physical form. There are a few options to buy virtual gold which will not only enable you to earn the upside on gold, but will also spare you from worrying over its safety and storage.

As on Oct 27, 24-karat-gold was priced at ₹7,976 per gram and 22-karat is priced at ₹7,313 per gram (Indicative prices). For more details, you can check the latest gold prices here.

Here we share some key details about sovereign gold bonds (SGBs) and gold ETFs so that you can decide which financial instrument deserves your money.

Sovereign Gold Bonds (SGBs)

Sovereign gold bonds (SGBs) are government securities denominated in grams of gold. They are seen as a replacement of physical gold. Investors are supposed to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank of India (RBI) on behalf of the Government of India.

The quantity of gold for which the investor pays is protected, since s/he receives the ongoing market price at the time of redemption/ premature redemption. They are considered better than physical gold since the risks and costs of storage are eliminated.

Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form.

The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc. One can buy these bonds from the issuing banks, SHCIL offices, designated post offices or agents. Each application must be accompanied by the PAN Number and an investor can buy upto 4 kg worth of gold every year

Gold ETFs

A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. Gold ETFs are units representing physical gold which may be in paper or dematerialised form.

One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.

Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Buying Gold ETFs means you are purchasing gold in an electronic form. You can buy and sell gold ETFs just as you would trade in stocks.

FAQs that you need to know about virtual gold:

Who should invest in gold ETF?

Gold ETFs are considered good for investors who want to earn the upside on gold but are still not keen to invest in the physical form on account of storage hassles or doubt relating to purity, and looking to get tax benefits. Besides, there is no premium or making charge, therefore investors stand to save money if their investment is considerable.

How can you sell gold ETFs?

Gold ETFs can be sold at the stock exchange through the broker using a demat account and trading account.

How can retail investors apply for SGB?

Retail investors can apply for each new tranche of SGB through the retail direct portal.

Can you get the cash in return for bond anytime? Is premature redemption allowed?

Although the bond tenure is 8 years, encashment is allowed only after fifth year from the date of issue on coupon payment dates. The bond will be tradable on NSD-OM. It can be transferred to any other eligible investor.

Are there any risks in investing in SGBs?

There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold which one has paid for.