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Gold ETF vs Sovereign Gold Bond (SGB): Which One Should You Invest in 2025?
20 Aug 2025
2 mins read
Gold ETF vs SGBs: Which is a Better Option?
It is often recommended that investors allocate 10% to 15% of their overall portfolio to gold, as it acts as a hedge against inflation and market volatility. While traditional options like gold bars and gold coins are available, they can be quite cumbersome due to issues related to storage, insurance, and safety.
Today, two popular and efficient ways to invest in gold as a financial asset are through Gold ETFs (Exchange Traded Funds) and Sovereign Gold Bonds (SGBs). Both options offer the convenience of holding non-physical gold, which eliminates challenges such as storage, transportation, safekeeping, and potential value depletion during conversion.
When comparing sovereign gold bond vs gold ETF, it's important to understand that both have their unique benefits and limitations. Gold ETFs are more liquid and can be easily bought or sold on stock exchanges at market prices. They are ideal for investors looking for short- to medium-term exposure to gold. On the other hand, SGBs, issued by the Government of India, come with the added advantage of earning annual interest (currently 2.5%) over and above the potential price appreciation of gold. However, SGBs have a longer lock-in period and are better suited for long-term investors.
In summary, choosing between a sovereign gold bond vs gold ETF depends on your investment horizon, liquidity needs, and financial goals. What’s most important is that both offer a modern, efficient way to invest in gold—without the hassles of physical ownership.
Table of Contents
Key Differences Between Gold ETF and Sovereign Gold Bond
Feature | Gold ETF | Sovereign Gold Bond (SGB) |
|---|---|---|
| Issuer | Mutual Fund Houses | Reserve Bank of India (on behalf of Government of India) |
| Form of Investment | Electronic (demat or held via mutual fund platform) | Electronic (demat) or physical certificate |
| Minimum Investment | 1 unit (equivalent to 1 gram of gold) | 1 gram of gold |
| Returns | Linked to gold price movements | Gold price appreciation + 2.5% annual interest (taxable) |
| Liquidity | High (traded on stock exchanges) | Moderate (8-year tenure with exit option after 5 years) |
| Tenure | No fixed maturity | 8 years (with exit option after 5th year on interest dates) |
| Tax Treatment | Capital gains tax (after 3 years: LTCG @ 20% with indexation) | Capital gains on maturity are tax-free; interest is taxable |
| Collateral Use | Can be used as collateral for loans | Can be used as collateral for loans |
| Storage & Safety | No physical storage required | No physical storage required |
| Annual Charges | Expense ratio (typically 0.5%-1%) | No annual charges |
| Interest Income | None | 2.5% per annum (paid semi-annually) |
| Best Suited For | Short- to medium-term investors seeking liquidity | Long-term investors looking for returns + gold exposure |
Which Is Better for You – Gold ETF or Sovereign Gold Bond?
For Short-Term Investors: Gold ETFs are better due to high liquidity and easy trading on stock exchanges.
For Long-Term Investors: SGBs offer additional 2.5% annual interest and tax-free capital gains on maturity, making them ideal.
Based on Tax Efficiency: SGBs have the edge as capital gains are tax-free if held till maturity, unlike Gold ETFs which attract LTCG tax. SGBs suit those who can stay invested for at least 5–8 years. Gold ETFs are flexible and suitable for tactical, short-duration gold exposure. Choose based on your investment horizon, liquidity needs, and tax preferences.
Gold ETFs and SGBs are similar in some ways
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.
How Gold ETFs differ from Sovereign Gold Bonds (SGBs)?
Before you make a choice between SGBs and gold ETFs, here are some key differences to know about.
- In terms of returns, SGBs have an edge over gold ETFs since the SGBs pay 2.5% (subject to change from time to time) assured interest per annum. Other than that, both are a play on the price of gold, so the market risk is always there that gold price could fall down. Gold ETFs entail transaction and statutory charges, apart from the total expense ratio (TER) of the fund that gets debited to the unit holder.
- Secondly, gold ETFs are not accepted as collateral by most banks for loans. On the other hand, getting loans against gold bonds is a lot easier and the bank through which you buy the gold bonds arranges the loan.
- SGBs score on capital gains taxation. Gold ETFs are treated as non-equity so they become long-term gains if held for more than 3 years. LTCG is taxed at 20% with an indexation benefit while STCG is taxed at the peak rate applicable. In the case of SGBs, the entire capital gains amount is tax-free in the hands of the investor if it is held for the full quota of 7 years.
- One area where gold ETFs score over SGB is in secondary market liquidity. Entry and exit from gold ETFs is quite simple. Gold ETFs can be bought and sold in the secondary market like any other stock and follow the normal T+2 rolling settlement cycle. On the other gold bonds are not available on tap, but only with the government issuing the tranche. The secondary market liquidity in SGBs is very thin.
- The other area where gold ETFs score is in the ability to manage risk. You can put stop losses and exit gold ETF if the pricing is not to your liking. That flexibility is not available in SGBs. Also, there are no upper limits to the transactions in gold ETFs while gold bonds cannot exceed 4KG per year.
Conclusion – Making the Right Gold Investment Decision
Choosing between Gold ETFs and Sovereign Gold Bonds depends on your financial goals, investment horizon, and liquidity needs. For short-term flexibility, Gold ETFs are ideal, while SGBs offer better returns and tax benefits for long-term investors. Evaluate your priorities carefully to make the most suitable gold investment decision.
