Sovereign Gold Bonds vs Gold Exchange-Traded Funds: Which is Better in Terms of Returns?

Apart from physical gold, investors have the option of investing in Gold Exchange-Traded Funds (ETFs) and Sovereign Gold Bonds (SGBs), which have gained popularity in the past few years.

Gold ETFs are a form of passive investment tool known to track domestic physical gold prices on a real-time basis and invest in gold bullion subsequently. 

Typically, Gold ETFs represent physical gold in electronic or demat (dematerialised) form, which is suitably backed by physical gold of quite high quality and purity. At least one Gold ETF unit is usually equivalent to one gram of gold.

Gold ETFs are known to be unique, considering they combine the dual features of ease in gold investments and the flexibility of stock investment.

As an investment route for investors who want exposure to gold, before investing in Gold ETFs, an investor is required to focus on tracking errors, management expenses, and capital gains tax, which is dependent on the tenor of holding.

On the other hand, SGBs, which are issued by the Reserve Bank of India (RBI), act as a substitute for physical or digital gold.

SGBs can be purchased online as well as offline in offline mode. For offline purchases of SGBs, one can visit authorised banks, Stock Holding Corporation of India Ltd (SHCIL), designated post offices, and stock exchanges such as the National Stock Exchange (NSE) and BSE.

The lock-in period of the SGB is eight years from the date of the issue of the bonds. The pre-mature redemption of the bond is permitted after the fifth year of the date of issue of the bonds, and such repayments shall be made on the next interest payment date.

However, SGBs will not be given on the same day of purchase. They will be given after the issue date, and a notification will be dispatched via email and SMS. 

For any investor, the choice between investing in SGBs or Gold ETFs is solely dependent on their investment goals, risk appetite, and investment horizon. SGBs are known to provide 2.5% semi-annual interest in addition to the maturity amount that accrues to investors at the time of the culmination of the scheme.

Also, when it comes to tax efficiency, SGBs are better than Gold ETFs. Having said that, Gold ETFs provide flexibility and offer higher returns, which come along with additional costs and tax considerations.