InvestorQ : Which investment option is better – Sovereign Gold bonds, Gold ETFs, or Gold mutual funds?
Diya Chitale made post

Which investment option is better – Sovereign Gold bonds, Gold ETFs, or Gold mutual funds?

Answer
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1 month ago
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Lock-in period and maturity:
Gold mutual funds and Gold ETFs do not have any lock-in period, so neither do any of them have a maturity period. So, gold ETFs do not have any exit load either, but gold mutual funds could have a nominal exit load due to the policy of the fund house. In the case of gold bonds, there is no exit penalty or lock-in period. But if the gold is in physical form and one does not wish to convert it into Demat form, one has to wait until maturity, which is generally eight years. So, Gold ETFs are a better option in this case.

Liquidity:
Gold mutual funds have better liquidity as they are offered by the AMCs, so they always try to maintain maximum flexibility for the investors. Similarly, Gold ETFs are dealt with in the secondary market, so they also have comparatively better liquidity.
However, Gold bonds are dealt with in both primary and secondary markets. So, there is less liquidity as compared to other investment options. So, Gold ETFs are a better option in this case.

Income/Returns: Interest income is only received on Gold Bonds and not Gold ETFs or mutual funds. Such rate of interest offered is 2.5%. However, it is variable as RBI issues bonds in tranches.

Taxation:
It is the same for three of them:
If one sells their holding for up to 3 years, the resulting capital gains are taxed at their marginal tax rate.
If the holding is sold after 3 years, it becomes taxable as Long-term capital gain and will be taxed at the rate of 20% with indexation.

However, Sovereign Gold Bonds has two additional advantages:
  • Interest income on these bonds is taxed at the investor’s marginal rate.
  • If the investor exits the position by redeeming the bonds with RBI, any capital gain is exempt from tax. It is only taxable when an investor sells the bonds to a fellow investor.
  • Therefore, SGB is the clear winner.
Expense ratio:
Gold ETFs and Gold mutual funds have a higher expense ratio compared with Gold Bonds. This is because gold bonds do not have transaction cost or impact cost, no matter whether they are dealt with in the primary market or secondary market. So, SGB is a better option.

As we can see on different parameters, SGB will provide better returns comparing other investment options. They have a low expense ratio, better tax exemption, and generate interest income for the investors, which other options do not. So, investment in SGB could be a better option.

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