With inflation in the United States going through the roof and the Russia-Ukraine war fuelling uncertainty in global markets, investors across the world are scrambling to diversify their investment in a way that enables them to secure high returns but also keeps them secure in case of a stock market crash. Against this backdrop, several investors are inclining towards investments in non-physical gold -- primarily ETFs and Sovereign Gold Bonds (SGB).
Here's a look at the pros and the cons of both these investment options
In about three decades after their introduction, exchange-traded funds (ETFs) have become very popular among investors looking for an alternative to mutual funds. Therefore, identifying the advantages and disadvantages of ETFs can help investors navigate the risks and rewards.
Cost-effectiveness: By just paying one brokerage fee, the fund may invest in upwards of 50 different listed stocks.
Diversification: An ETF typically invests in many stocks and thus, it helps the investor spread money across companies.
Convenience and transparency: ETFs can be purchased on margin and sold short. Also, ETFs trade like a stock. One can quickly look up the approximate daily price change.
Currency risk: If your ETF of choice invests overseas, fluctuations in foreign currency can impact your returns.
Volatility: As ETFs are not immune to volatility in the market and an investor can still suffer losses in a bear market.
Lower dividend yields: Returns from ETF may not be as high as owning a high-yielding stock or group of stocks.
Sovereign Gold Bonds: The Reserve Bank of India offers SGBs on behalf of the Government of India. The price of gold gets reflected in the price of the bonds issued.
Safety: It is a digital way to invest in gold and the Government of India guarantees its safety.
Tax-efficient: If you redeem your bonds after the maturity period, there is no tax on capital gains.
Loan collateral: Investors can take loans against SGB. Further, investing in SGBs is affordable.
Long maturity period: SGBs have a long eight-year maturity period. Many investors don't want to wait that long.
Available only in tranches: Unlike other investment options, you can’t invest in sovereign gold bonds at any time. It is only available when RBI issues it.
Low return: Like gold, SGBs are also seen as hedge investments. They are good for reducing risk and diversifying ones' portfolio but may not offer lucrative returns. However, in addition to returns equivalent to the price of pure gold, investors get a fixed annual interest rate of 2.5 percent on the bonds.
(Edited by : Sudarsanan Mani)