The festivals of Dhanteras and Diwali are considered to be the most auspicious day to make investments. There are many ways you can invest in gold: physical gold, gold exchange-traded funds and sovereign gold bonds. Here is a comparison.
The festivals of Dhanteras and Diwali are considered to be the most auspicious day to make investments. Investing in gold on Dhanteras is a tradition in India, while stock market investors purchase equities during Muhurat trading on the day of Diwali. There are many ways you can invest in gold: physical gold, gold exchange-traded funds and sovereign gold bonds. Here is a comparison.
Gold ETFs and sovereign gold bonds are more convenient than physical gold as it will spare you from difficulties of selling, storing and checking the quality of physical gold.
Sovereign gold bonds are guaranteed by the government and hence there is no risk of default. In the gold ETF, the credit risk is also very minimal.
Interest: The sovereign gold bonds pay an interest of 2.50 percent per annum (taxable). This is an added benefit to the investors which is not available with the gold ETF. However, both options are subject to capital appreciation or depreciation of gold prices. This is not applicable to physical gold. The return on physical gold is lower than the real return on gold due to making charges.
Transaction charge: Gold ETF investors need to pay transaction charges if they want to trade ETFs. There is no such charge involved with sovereign gold bonds if they don’t exit through the exchanges. Gold ETFs also deduct some charges in the name of total expenses ratio from the total assets. This expense ratio ranges from 0.48 percent to 1.18 percent per annum of the total assets.
Redemption: Investors can enter or exit from gold ETFs during any working day of the stock exchanges. On the other hand, the redemption of the sovereign gold bond is allowed after the fifth year from the date of issue on coupon payment dates. However, these bonds will be tradable on Exchanges, if held in demat form (but, liquidity may be limited).
Taxing: No capital gains tax is payable if the sovereign gold bonds are held till maturity, while gold ETFs held for more than three years attract capital gains tax. A tax of 20 percent, plus surcharge and education cess, is applicable on the sale of physical gold assets held for over 36 months.
In case the SGBs are sold before the maturity date on the exchanges, the capital gains will be levied at the applicable rates i.e. long term tax of 20 percent after indexation.
First Published: IST