Sovereign Gold Bonds (SGBs) vs Physical Gold- Which Is A Better Investment Option?
Time immemorial, gold has always been the most coveted possession in India. It serves as a symbol of royalty, an award for doing good deeds, it is a mode of exchange, acts as an offering to The Almighty in various places of worship, and/or is used as a gift for loved ones. In its various physical forms, gold has remained the most prized asset, reward, or offer for many in India. Hence, the possession of gold will always be a strong symbol of the financial support system. One can invest in gold by purchasing gold biscuits, gold coins, Sovereign Gold Bonds (SGBs), and Gold ETFs. Each one of these has its pros and cons.
Gold even acts as an asset, adding value to your investment portfolios and helps in its diversification. Financial experts advise that an investment portfolio must have at least 10%-20% of assets invested in gold. This is so because the yellow metal serves as a perfect hedge against inflation and currency risk. In this blog, Fintra explains the following topics:
- Investing in Sovereign Gold Bonds (SGBs)
- Pros of investing in Sovereign Gold Bonds (SGBs) over Physical Gold
- Cons of investing in Sovereign Gold Bonds (SGBs) over Physical Gold
- Investing in Physical Gold
- Pros of investing in Physical Gold over SGBs
- Cons of investing in Physical Gold over SGBs
Before we jump into comparing both forms of gold, do note that Sovereign Gold Bonds (SGBs) are government securities issued by the Reserve Bank of India (RBI). Denominated in gold, these debt securities offer fixed interest on the investment. To know about SGB, please click here and here. There are various ways to own gold. It is available in physical forms and as paper. In physical forms, one can purchase jewellery, coins, bars, and artefacts. On the other hand, Paper Gold is available in the form of Sovereign Gold Bonds (SGBs), Exchange Traded Funds (ETF), and Gold Mutual funds that invest in ETFs. When the question arises of which to choose that is safest, yet liquid and gives good returns, then, the person should thoroughly understand both the forms' true essence. Hence, let’s dive into both instruments to comprehend them better.
Investing in Sovereign Gold Bonds (SGBs)
As mentioned earlier, SGB is a gold investment, which you can purchase in paper form. Unlike the other forms of paper gold, you don't need to have a demat account to purchase SGBs. However, if one desires to trade them on an exchange, you then need to have your holdings of SGBs in demat accounts, otherwise, the operations of the secondary market can't be performed.
SGBs are issued by RBI. Periodic windows get opened typically every two to three months. They remain open for about a week or more so that the investors can purchase the bonds at the issue price per gram of gold. If the investor looks forward to off-period purchases, they are required to purchase the bonds from the secondary market at their market value.
Pros of investing in Sovereign Gold Bonds (SGBs) over Physical Gold
1. Term of SGB: SGBs have a tenure of 8 years with an assured interest rate of 2.5%, disbursed bi-annually. Premature redemptions at ongoing market prices could be done for those who look for early liquidation.
2. It's a safe bet for investors: Unlike physical gold, SGBs are a safer investment option because it is dematerialised, have no risks of losing it in hazards of safekeeping or storing it, reduce the issue involved in making charges of jewellery, and purity of gold purchased.
3. The risk of price loss is minimal: Since it is devoid of making charges applicable to purchasing gold jewellery or assessment of its purity, SGBs can be purchased at a price close to the actual market value of gold.
4. Anyone can purchase SGBs: In a fiscal year, the following individuals, with the minimum denomination allowed being 1 gm, can purchase the maximum denominations as mentioned below:
o Individuals – 4kgs
o HUF – 4kgs
o Trust – 20kgs
However, investors may purchase gold as per their financial capacity.
5. Gain on online purchases: When purchasing SGB online, it is generally cheaper as it costs around Rs. 50 less per gram when compared to its otherwise nominal value.
6. Avail loans against SGBs: When opting for a loan, SGBs can be used as collateral. RBI’s stipulated ‘loan to value’ ratios are good and matches the applicable ratios for a loan against gold.
7. Tax gain: Taxation rules are in favour of SGBs because capital gains are exempted from tax, whereas the exact gains availed from gold are taxable in the hands of the investor.
8. Hedge against Inflation: Since ancient times, gold values have seen substantial capital appreciation. Thus, investors can benefit from the increases in the real value of the investments and accumulate considerable wealth over time.
9. Demat Account: Investors can keep SGBs in a demat account. However, investors should make a request for it in the application form for this to happen. Until the dematerialization process is completed, the SGBs are kept in the RBI’s books. Moreover, the facility of converting the holdings to demat is available after the allotment of the bond.
10. Easily Traded on the Stock Exchange: Investors can easily trade their SGBs on the stock exchanges. For example, after owning the bond for five years, investors can trade them on the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).
Cons of investing in Sovereign Gold Bonds (SGBs) over Physical Gold
1. Less liquidity: Compared to physical gold, SGBs have lesser liquidity. With five years lock-in-period from their coupon payment dates, one can trade them in the secondary market only post that. Moreover, the redemption procedure involves one day lag between the application and the credit of the redemption amount in the bank account.
2. Volatility Involved: If the gold price falls, there could be a risk of making a loss in the invested capital in SGBs. However, the total units of gold that have been invested remain intact.
3. Redemption Blues: In the case of SGBs, at the time of redemption at maturity, one could face a slight loss in the gold price in the bonds, owing to the process involved in arriving at the closing price, which involves averaging of the price of 24 karat gold over the last three business days before redemption.
Investing in Physical Gold
In general, gold is the most favoured form of investment if it is in a tangible form. One can purchase it as jewellery, gold coins, artefacts, gold biscuits and bars. Usually, the purchase of physical gold is kept confidential, unlike the purchase of digital gold. Since this yellow metal can be brought directly from a jeweller, there is no broker or intermediary involved. Hence, it is free from counterparty risk.
Although there is no limit on purchasing physical gold, gold biscuits are made available in a minimum of 10 grams; hence, the minimum investment is slightly higher in the case of physical gold. Experts suggest always maintain physical proof of all gold purchases as it helps them with income tax filing. Moving on, gold coins of 24 karat purity and 999 fineness are also available in denominations of 5 and 10 grams. Gold bars are generally available in 20 grams. These gold types are brought over the counters from various jewellery stores. Some jewellery is also made available online for sale and gets delivered to your doorsteps. One can find and purchase these gold forms on online platforms such as Amazon, Flipkart, Snapdeal, and many others where it is referred to as ‘Digital Gold’. Buyers can complete their payments via various payment options such as cash, cheque, card payments, and digital modes like net banking, Paytm, G-Pay, etc.
Pros of investing in Physical Gold over SGBs
1. Ease of purchase: Depending on the kind of purchase, gold jewellery, bars, and coins are now readily available over the counter at jewellery stores, banks, and various online platforms.
2. Triple benefits of Gold: Seeking an investment that's safe, beats inflation and gives good returns, which hedges inflation and is highly liquid- then, gold undoubtedly gains an edge over SGBs. Along with protecting from inflation, gold investments can even help in protecting assets from currency depreciation.
3. Gold's Resilience: Gold's price is inversely related to those of equity market investments. For example, if the equity market is at a high, and gold being a debt market instrument, the price of gold will likely go down. However, as the debt market bounces back, then, gold's price has historically risen with stronger momentum, thus hedging inflation overall and serving as a buffer to investments against market volatility.
4. Ease of sale: Gold in its physical form can easily be liquidated and sold in the market whenever the need arises to meet your financial emergencies without the time lag against cash. In the case of SGBs, this isn't possible.
5. Take physical possession: Investors can keep the investment in physical form with themselves. They can store it as coins, ornaments, or bars. Hence, it is believed to be one of the safest investments.
Cons of investing in Physical Gold over SGBs
1. It's difficult to store: Since gold is a high-valued metal, it is risky to store it at home. Thus, storage and safekeeping of the gold asset will always be a challenge as there will be a risk of theft. Although bank lockers store gold, they come at a price. Moreover, understanding the purity of gold and its ‘making charges’ in jewellery purchases calls for a premium charge for owning it. For this reason, in the case of SGBs, there are no such risks and charges because they can be purchased at a cost close to the real price of gold.
2. Gold loss in exchange for outdated jewellery: At times, gold jewellery designs might feel outdated to the changing generations and their tastes. Sometimes due to the growing prices of gold, might also keep new purchases out of reach for various interested investors. Thus, this leads to dissatisfaction among people. Moreover, the loss of gold, and value in the exchange process is separate.
3. Physical gold doesn't earn interest: In most households in India, gold isn't perceived as an investment. Some attach their emotions and sentiments to gold; they don't seek to sell it for profit. Moreover, physical gold can't be referred to as a passive investment instrument because it doesn't earn any interest, but one can earn an income from it only when it liquidates the physical gold in the open market.
4. Loss in distress sale: Though gold is liquid and acts as financial support in distress sale during times of equity market Bull Run, it could prove costly to the seller.
Conclusion
For Indians for many generations, gold has been the go-to investment. With changing times, investing in gold has also experienced numerous changes. Investing in gold jewellery, gold coins, and gold biscuits isn't the only option available- the Government of India has now introduced digital gold in the form of mutual funds certificates which can be held in dematerialized format. Having gold in an investment portfolio is vital because it allows better portfolio diversification and furnishes you with financial protection during economic uncertainties
By investing in Sovereign Gold Bonds (SGBs), you don't need to worry about it being stolen, storage costs or even the purity of gold. However, with SGBs, you could face an issue with liquidity. On the other hand, physical gold is universally accepted; can be sold anywhere, anytime in return for cash.
As described above, gold is comparatively more stable when compared to other investments during market volatility. It serves as a hedge against inflation and economic uncertainties that in turn stabilizes the value of the investor’s portfolio. Hence, before deciding which to invest in, do consider the pros and cons and compare their liquidity aspects, minimum investment requirements and storage, etc.
