5 mins read . 16 Jan 2023
It is said that investors must allocate 10% to 15% of their overall portfolio corpus to gold. Investing in gold can be done via gold bars, gold coins; but they can be quite cumbersome Two very popular ways of investing in gold as a financial asset is through gold ETFs (exchange traded funds) and via sovereign gold bonds (SGBs). It is tough to make an either / or choice since both gold ETFs and SGBs have their own merits and shortcomings. However, what is important to note is that both gold ETFs and SGBs are ways of holding gold in non-physical form. Non-physical gold overcomes problem like storage, transportation, insurance, safekeeping, conversion value depletion etc. How to choose between gold ETFs and SGBs?
Interestingly, both SGBs and gold ETFs can be regarded as safe since they are regulated and backed by gold. The difference is that in the case of SGB, there is an explicit guarantee by the government on gold value in grams and the interest payment. But there are also other ways in which gold ETFs and SGBs are similar. Both gold ETGs and SGBs are in non-physical form and that substantially reduces the cost of holding gold. Storage and administration costs are also low since these gold ETFs and SGBs can be purchased in the secondary market with minimal entry and exit costs. The third similarity is that both are backed by physical gold while 1 is actually backed by gold in a custodian bank, SGBs carry a central guarantee.
Before you make a choice between SGBs and gold ETFs, here are some key differences to know about.
The choice between gold ETF and SGB has to be made based on overall returns, risk, tax efficiency, liquidity and simplicity. While SGBs score on returns, risk and tax efficiency, it is gold ETF that score on availability and liquidity. The choice is yours!