uTrade Algos
Gold has always been a preferred form of investment, particularly on auspicious events such as Akshaya Tritiya and Diwali, where gold is bought for ceremonial purposes in India. But people are now turning to other forms of gold investment, in paper form, as the price of actual gold keeps increasing. Gold Exchange-Traded Funds (ETFs), sovereign gold bonds (SGBs), and physical gold are some of the most common investment products related to gold. Before deciding on investments, it is essential to understand each of them. This guide lists the three widely used products for investing in gold. The gold trading price in India is influenced by a mix of global market factors, domestic demand, and supply dynamics, all of which contribute to its fluctuation in the local market.
Unlike yellow metal, investors do not possess a physical form of Gold in such investment products. They can retain it as an investment that will be available whenever needed. In this article, you can learn about the key differences, advantages, and disadvantages of investing in gold ETF vs. SGB vs. physical gold.
So, let’s move ahead in this physical gold vs. gold ETF vs. SGB war. Just as investors have choices between various forms of gold investment, understanding the difference between bulk and block deals in the stock market provides valuable insights into the diverse options available for trading and investment strategies.
Table of Contents
What are Gold ETFs?
The Gold ETF is an exchange-traded fund that tracks the price of physical gold at home. These funds create a basket of gold bullion and are passive investment instruments based on gold prices. ETF investors can also invest in Gold ETFs directly with a Demat account, as is the case for other ExchangeTraded Funds. One Gold ETF is the same as one gram of gold. These ETFs are traded on several stock exchanges, such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), and follow trading procedures similar to those for stocks.
ETFs do not deliver physical gold to investors, but they provide the only way to make profits from differences in market prices for physical gold. Once sold, the gold ETF provides investors with cash equal to the currently established domestic price of gold.
What are Sovereign Gold Bonds?
As a marketable security, sovereign gold bonds are an alternative to the purchase of physical gold. The bonds provide the holder with interest and an obligation to repay the principal at maturity.
On behalf of the Indian Government, the Reserve Bank is issuing sovereign gold bonds. Investors have to pay the issue price in cash and can redeem the bonds in cash at maturity. In the case of sovereign gold bonds, quarterly interest payments are made to bondholders, and they shall be paid back in favour of investors based on today’s gold prices and their holding value.
As a viable investment, sovereign gold bonds are denominated in multiples of grams, with a minimum of one gram and a maximum of 4 kg. In addition, with a duration of 8 years, sovereign gold bonds pay an interest rate of 2.50% per annum, semiannually, on the nominal value.
What Is Physical Gold?
The most traditional way of investing in gold is to buy physical gold for personal or investment purposes. The underlying asset for the gold ETF and the sovereign gold bond is physical gold, the basis of India’s gold price. Investors buy physical gold from local jewellers in the form of jewellery, bars, or gold coins, which are then stored at home or in secure storage facilities.
As the price of gold continues to rise, investors around the world are becoming increasingly convinced that physical gold is an invaluable asset for effectively hedging investment losses. The fact that physical gold is used as an instrument to obtain a gold loan based on the interest rates of such loans is one of the most important benefits of physical gold.
To obtain a loan in gold, lenders may effectively pledge physical gold as collateral. The interest rate of the gold loan will be determined by its purity, and the maximum amount to be offered is based on the total value of that gold. During the loan term and after the loan has been repaid, the lenders shall keep the pledged physical gold safe and return it to the borrowers.
Gold ETF vs. SGB vs. Physical Gold
The various investment options available to individuals wishing to invest in gold include, but are not limited to, Gold ETFs, Sovereign Gold Bonds, and physical gold. There are various characteristics, advantages, and considerations for each option. Let’s see how they compare.
Gold ETF vs. SGB
Both are easy ways to gain exposure to physical gold in an investment portfolio while avoiding the hassles of ownership and storage. It’s also suitable for a broader range of investors based on their purchasing capacity since as little as 1 gm of gold can be bought electronically. In addition, there are no additional costs to be incurred by the investor in connection with making payments or other charges.
SGBs are guaranteed for five years, while ETF units may be used according to the holder’s choice. The Demat account, which is not mandatory in the case of bond ownership, is a prerequisite for investment in an ETF. The ETF does not restrict the size of electronic units for individuals, companies, or trusts compared to the SGB’s four kilograms per individual and twenty kilograms per firm.
Physical Gold vs. Gold ETF
With limited spreads and minimal transaction charges, the ETF can easily be traded anytime. Physical gold sales are slower because prospective buyers must see the property personally. Still, a highly liquid market for physical gold is available once that obstacle has been overcome with internationally accepted standards of quality that protect both parties.
The critical difference between these two investment forms is that the investor owns gold exclusively through physical gold. An ETF is offering an equivalent quantity of gold, which means that there’s a chance for investors not to be repaid their initial investment if the trust in charge of the ETF collapses.
Sovereign Gold Bond vs. Physical Gold
Physical Gold remains an important cultural and social status symbol. In the case of ornaments, jewellery, and family events, they will likely be replaced differently. This means it does not have a strict lock-on period, thus allowing easy liquidation. Most jewellers worldwide can buy, sell, and exchange jewellery quickly.
As with all three investment options under discussion, the government decides on the fixed price while issuing bonds, yet these prices are also paid through a market-driven mechanism. The government also compensates the initial investments with a 2.5% return. Regarding liquidity, since the bonds are locked in for five years before they can be traded on the stock exchange, physical gold is more liquid than SGB.
Why Are Gold ETF Prices Different from Physical Gold?
For several reasons, the price levels of gold ETFs and physical gold may vary from one another. Some of these reasons are:
- Supply and demand
- Storage and transaction costs
- Market Dynamics
- Premiums and discounts
Conclusion
Understanding the differences between these types of investments is helpful if you wish to make investment decisions by brainstorming and choosing between physical gold vs. gold ETF vs. SGB. Gold ETFs are similar to buying an equivalent amount of physical gold but without the hassles of having to store the physical gold. Therefore, the gold is not subject to theft because it is stored as Demat paper. Gold funds are investments in gold mining companies. The kind of digital gold the RBI issues is the sovereign gold bond.
You can choose from several types of gold investments, along with other commodities, currencies, and stocks, with your Share India Digital Account. You can sign up for a new account and start investing immediately in a few easy steps! Learn how ETFs work to invest in a diversified portfolio of assets, including gold, through a single security traded on stock exchanges, offering liquidity and flexibility in managing their investments.