If you’re considering investing in gold in 2023, you might be wondering whether to opt for a Sovereign Gold Bond (SGB) or a Gold Mutual Fund. Both investment options have their unique features and benefits, making it essential to understand their differences to make an informed decision.
What Is a Sovereign Gold Bond?
A Sovereign Gold Bond (SGB) is a financial instrument issued by the Indian government that enables investors to invest in gold without physically owning it. These bonds are denominated in grams of gold and are issued in multiple tranches throughout the year. The maturity period of SGBs is eight years, and they offer a fixed interest rate of 2.5% per annum. The interest is paid semi-annually, and at maturity, the final interest payment is made along with the principal amount. The price of SGBs is linked to the prevailing market price of gold, and they can be traded on stock exchanges.
SGB: The 2023 Update
The SGB scheme has been in existence for over seven years, providing investors with an alternative to physical gold ownership since its introduction in 2015. Across 64 series, there has been an average subscription of 1.72 tonnes. In June 2023, the gold price for SGBs reached ₹5,926 per gramme, the highest price since the beginning of SGBs, showing an almost 10% increase from the December 2022 series, which had a price of ₹5,409 per gramme. It’s crucial to remember that the SGB prices do not include the 3% goods and services tax (GST) on gold.
How Is It Different from a Gold Mutual Fund? Returns, Risk, and More.
The stock market’s benchmark index, Nifty, saw a 6% gain from January to June in 2023, reaching 19,189.5 points. However, in 2022, gold outperformed stocks, becoming the top financial asset class with a 13% return, from an issue price of ₹4,791 per gram in December 2021 to ₹5,409 in December 2022. In comparison, Nifty yielded only a 4.3% return in the same period, reaching 18,105 points.
SGBs and gold mutual funds have their advantages and drawbacks. SGBs offer interest income and tax-free capital gains after eight years but come with limitations such as no redemption before the fifth year. On the other hand, gold mutual funds offer professional management and a diverse portfolio, making them suitable for investors with limited knowledge of the markets. The choice between SGBs and gold mutual funds depends on investment goals, risk tolerance, and financial situation.
Difference between SGBs and Gold Mutual Funds
Gold mutual funds are managed by asset management companies that employ fund management teams. These teams pool the money from investors and invest it in various securities like stocks and bonds to achieve a common investment objective. As these funds are professionally managed, investors do not need extensive market knowledge and can enjoy diversified portfolios at a relatively affordable price.
SGBs vs. ETFs. What’s the Difference?
SGBs are distinct from gold and exchange-traded funds (ETFs). They offer tax-free capital gains after eight years and an annual interest payment of 2.5% paid twice a year. The interest is calculated based on the issue price, which helps offset any loss in capital if the gold price decreases when you redeem the SGBs. The interest amount is taxable under the Income Tax Act, and you can redeem SGBs after five years from the issue date.
Investment in SGBs requires a minimum of 1 gram and a maximum of 4 kilograms per year for individuals. Government-approved trusts can buy up to 20 kilograms per year through banks, post offices, and stock markets.
Subscription for Sovereign Gold Bond 2023
The Sovereign Gold Bond Scheme 2023-24’s first tranche was open for subscription from June 19 to June 23, 2023, at an issue price of ₹5,926 per gram of gold. Those purchasing the bonds using digital payment received an additional ₹50 discount. The bonds were issued on June 29. The second tranche of SGBs for the year was available from September 11 to 15.
Final Words
Investing in a Sovereign Gold Bond can be an attractive option for those looking to invest in gold without holding physical gold. With a fixed interest rate, tax benefits, and market linkages, SGBs offer a unique investment proposition. However, before making a decision between SGBs and other gold investment options like gold mutual funds or ETFs, it is crucial to consider your investment goals, risk tolerance, and financial situation. Seeking advice from a financial advisor can help you make an informed choice.
