Best way to invest in gold: SGB, gold fund, gold ETF

Indians are well known to have a great affinity for gold investments. From traditional physical investments in the form of jewellery or bullion, options have now expanded to virtual investments in gold. Sovereign gold bonds (SGBs), gold mutual funds (MFs) and gold ETFs (exchange traded funds) have become the most prominent ways to invest in gold.

Though these options track the same underlying — gold — there are significant differences between them when it comes to return, liquidity, risk, ease of investment and taxation. As a gold investor, you must understand and compare these so that you can make the best of the gold investment options according to your financial standing.

How pricing matters?

The issue price of the SGB for the ongoing subscription period (ending on June 24) has been kept at Rs 5,926 per gram. As per IBJA, a gram of gold of 999 purity had a price (AM) of Rs 6,121 on May 15. The offered price in the current SGB subscription is lower. However, gold prices have corrected of late. It reached Rs 5,886 per gram on June 21, which is lower than the current tranche’s issue price. So in SGB, the price comes with a lag. This may be beneficial but not always. When it comes to gold funds or ETFs, you can get the same-day price if you invest before the daily cut-off time of 3 pm.

Where is the lowest cost of investment management?

Cost of investment plays a vital role in arriving at the net return. “The cost of investment management is relatively low for SGBs as they are issued by the government. However, there may be brokerage charges or transaction fees during the buying and selling process,” says Sanjeev Govila, a certified financial planner and CEO of Hum Fauji Initiatives.

Gold mutual funds cannot avoid fund management costs. “Gold mutual funds charge an expense ratio, which covers the fund management fees, administrative costs and other expenses. The expense ratio varies across mutual fund schemes,” says Govila. Typically these funds charge an expense ratio between 1% and 2%.

When it comes to ETFs, the cost is lower than gold funds. “Gold ETFs also charge an expense ratio, which is relatively lower compared to gold mutual funds. The expense ratio covers the fund management fees and operational expenses,” he says.

Which one scores higher on total return?

The total return on SGBs comprises two components: the fixed interest rate paid annually, and the capital appreciation based on the prevailing gold prices. The interest rate and capital appreciation together determine the overall return.

The total return of gold mutual funds is based on the performance of the underlying assets, which is influenced by the price movements of gold. The returns are directly linked to market performance. However, investors have to bear an expense ratio of 1% to 2%. This brings down the net return.

Similar to gold mutual funds, the total return of gold ETFs is based on the price movements of gold. The returns are directly linked to market performance. However, the expense ratio of ETFs is much less than that of gold funds. Typically, a gold ETF has an expense ratio between 0.2% and 0.5%.

Therefore, due to the extra interest and lower cost, SGB has no competition as its returns will always be more than those of gold MFs or gold ETFs.

How different forms of paper gold scores

Particulars Sovereign Gold Bonds Gold Mutual Funds Gold ETFs
Entry price Simple average of closing price of gold of 999 purity of previous 3 business days published by IBJA Price with a lag of hours to a working day Price with a lag of hours to a working day
Investment limit Minimum 1 gm to maximum 4 kg for individuals Unlimited Unlimited
Holding form Holding certificate or demat MF units or demat MF units or demat
Lock-in 8 years No No
Cost of management Nil 1-2% of the fund’s AUM 0.2-0.5% of the fund’s AUM
Additional return 2.5% annual interest paid at half yearly interval No No
Total return Gold price appreciation + 2.5% p.a. interest Gold price appreciation – fund management fees Gold price appreciation – ETF management fees
Liquidity Premature redemption allowed after 5 years. However, the bond is tradable on stock exchange after a fortnight of issuance Can be bought or sold any time, providing liquidity to investors Are highly liquid; you can buy and sell quickly and easily
Taxation Gain exempted if held till maturity; sold after 5 years -20% with indexation; sold within 1-5 years – 10%; sold before 1 year – at slab rate Short-term gain taxable at the slab rate, long-term gain taxable at 20% Short-term gain taxable at the slab rate, long-term gain taxable at 20%

Source: ET Online Research and

How easy is it to sell the paper gold and get money?

SGBs become tradable on stock exchanges within a fortnight of issuance — on a date notified by the Reserve Bank of India (RBI). The redemption price will be in the rupee based on the simple average of the closing price of gold of 999 purity of the previous 3 working days published by the India Bullion and Jewellers Association Ltd (IBJA).

It is fairly easy to redeem your gold MF units. “Gold mutual funds can be bought or sold on any business day at the prevailing net asset value (NAV). They offer relatively higher liquidity compared to SGBs. Gold ETFs can be bought or sold on stock exchanges during market hours, providing high liquidity as they trade like any other stock,” says Govila.

Which one has the best ease of investment?

Gold bonds are issued as Government of India stocks under the Government Securities Act, 2006. Investors get a holding certificate for their investment. The bonds are eligible for conversion into the demat form.

Adhil Shetty, CEO of, says, “SGBs can be bought online through the RBI’s website or through the websites of the participating banks and institutions. SGBs are not physical gold, but rather government securities denominated in grams of gold. This means that investors do not have to worry about the storage and security of physical gold.”

Investing in gold MFs is not very difficult either. “It requires opening an account with a mutual fund company. The process involves filling out application forms (online or offline) and completing the necessary KYC documentation,” says Govila.

To invest in a gold ETF, you must have a demat account. “Investors can buy and sell gold ETF units on stock exchanges, similar to trading stocks,” says Govila.

Therefore, SGB scores more in this parameter too. “SGBs are the easiest to invest in, followed by gold ETFs and gold funds. Gold ETFs and gold funds can be bought and sold through a broker or online platforms,” says Shetty.

Which one gives you highest tax benefit?

The interest on SGBs is taxable under the Income Tax Act, 1961. The capital gains tax arising on redemption of SGBs to an individual has been exempted. “Indexation benefits are available on long-term capital gains arising to any person on transfer of bond,” says Shetty.

Taxation on gold mutual funds is similar to debt funds and attracts short-term capital gains tax. “From April 1, gains from investments in gold funds will be taxed at the slab rate irrespective of the holding period. However, you are liable to pay a 20.8% tax on long-term capital gains on gold sales,” says Shetty.

Where should you invest?

When it comes to risk, there is hardly any significant difference. “SGBs are issued by the RBI, while gold funds and gold ETFs are managed by AMCs (asset management companies). SGBs offer a fixed interest rate, while gold funds and gold ETFs track the price of gold. In terms of risk, all three options are considered to be low-risk investments,” says Shetty.

The question is who is best suited to invest in SGB? “Overall, SGBs are a good option for investors looking for a low-cost, government-backed investment with tax-free gains till maturity but with moderate liquidity in-between too,” says Govila.

Long-term investors should go for SGBs due to many benefits. “SGBs have the additional benefit of being backed by the Government of India. Plus they provide a guaranteed interest income. If you are looking for a low-risk investment with tax benefits, then SGBs may be a good option for you. If you are looking for an investment that is more liquid, then gold ETFs and funds may be a good option for you,” says Shetty.

However, if you can not predict your liquidity requirement now, gold funds may be a better option. “Gold mutual funds are a good option for investors who want the flexibility to redeem their investment at any time, invest automatically in small tranches through SIPs, or invest in a bulk amount whenever they wish to,” says Govila.

In case you are looking for the quickest liquidity option, ETFs are the best option. “Gold ETFs are a good option for investors who want the highest liquidity and who are comfortable trading on stock exchanges,” adds Govila.

William Murphy

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