Gold MF vs Gold ETFs vs Sovereign Gold Bond: Which is the best option for you?

Did you know that you don’t have to buy physical gold to invest in gold? Gold ETFs, Gold mutual funds and sovereign gold bonds are the three best ways to invest in gold without stepping out of your house. Investing in these options does away with the disadvantages associated with physical gold such as storage issues and risk of theft.

Investors should understand that investing in these options doesn’t guarantee any possession of physical gold. These investment options allow investors to take part in the price movement of gold. On redemption, the proceeds are credited to the bank account and there is no physical delivery of gold.    

In this article, we will see the differences between gold funds, gold ETFs and sovereign gold bonds.

What are these options?

Gold ETFs are units like stocks. Units are listed on the stock exchanges and it tracks the price of domestic gold.

Gold fund is a commodity mutual funds that is backed by gold ETF units.

Sovereign gold bonds are bonds issued by RBI on behalf of the government of India. Gold bonds come with a specific issue price. Besides the price movement of gold, investors receive an interest of 2.5% on the investment, which is paid on a half-yearly basis.

How to invest?

Mutual fund houses offer gold ETFs and gold mutual funds. However, investors need demat account to invest in gold ETFs.

Investors can invest in a gold mutual fund like a regular mutual fund. Systematic Investment Plan(SIP) is also available for gold fund investors.

As banks issue sovereign gold bonds, investors can invest in sovereign gold bonds online through their bank’s net banking portal or by filling up physical forms by visiting a bank branch. Demat account is not essential. However, investors with demat account can hold units in the electronic format. These bonds open for subscription in tranches for a few days every few weeks according to the RBI calendar.

What will be the returns/interest?

All the three options track the price of gold. The returns generated by gold ETF, gold fund and gold bond will depend on the price movement of the gold. Hence, investing in these options does not guarantee fixed returns.

 Also, gold bond investors receive an additional 2.5% interest paid half-yearly on their investment. 

What is the minimum investment amount?

The minimum investment limit for gold ETFs and sovereign gold bond is one gram of gold. One gram of gold is equivalent to one unit of gold ETF and gold bond. The current gold prices will determine the minimum investment amount for gold ETFs. RBI fixes the issue price of sovereign gold bond before gold bonds are open for subscription in the primary market.

The minimum investment amount for gold funds invested through the SIP route is Rs.500.

What is the maximum investment amount?

Gold funds and ETFs don’t have any maximum investment amount. Individual investors can invest a maximum of 4 kgs or 4000 units of sovereign gold units.

What is the investment tenure or maturity?

Gold funds and gold ETFs are open-ended funds. This means that there is no maturity date and investors can redeem their units at any time. However, depending on the fund and tenure, investors may have to pay exit loads.

Sovereign gold bonds have a maturity period of eight years. Investors with demat account can exit after the fifth year. However, liquidity of sovereign gold bonds in the secondary market may not be ideal.

How is the gains taxed?

Gold mutual funds and gold ETFs are taxed like debt funds. If investors redeem the units before three years from investment, the gains are added to the income and taxed as per the income slab. For investments held over three years, long-term capital gains of 20% along with indexation benefits will apply.

Investors don’t have to pay any taxes on capital gains on sovereign gold if the units are till maturity. On exit after the fifth year, tax on the long-term capital gains is 20% along with indexation. 

Conclusion

Gold mutual funds, gold ETFs and gold sovereign bonds are three simple and better ways to invest in gold. Depending on your individual needs and investment horizon, you can select the best investment option. Investing in gold through SIP in Gold Mutual Fund without worrying about maturity period the very convenient and better option.