Difference Between SGB and Gold ETF

difference between gold etf and sovereign gold bond

Gold is a desirable investment option for many investors in India because it is a safe investment and maintains its value in the long term. Aside from physical gold, gold can be invested in Sovereign Gold Bonds (SGBs) or Gold ETFs (Exchange-Traded Funds).

A Sovereign Gold Bond (SGB) is a bond issued by the government that allows you to invest in gold without owning the physical gold itself. In contrast, a gold ETF is a type of mutual fund that tracks the price of gold and is traded on the stock exchange.

If you are considering investing in SGB or a Gold ETF, this guide will help you make the right choice for your overall portfolio allocation.

Table of Contents

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What is SGB?

Sovereign Gold Bonds (SGBs) are government securities that the Reserve Bank of India issues. SGBs are a modern way to invest in gold, as you do not have to own gold physically. An investor who invests in SGBs will receive interest and benefit from the capital appreciation of gold.

The denomination of the bonds is for one gram of gold, making them affordable to all types of investors. The maturity period of the SGB is 8 years, but it has an exit option after 5 years. Upon maturity, the investor is entitled to the market value of gold and the interest accrued during that time.

What is a Gold ETF?

A Gold Exchange-Traded Fund (Gold ETF) is a type of investment fund that allows you to invest in gold without owning physical gold. Launched in India in 2007, Gold ETFs are linked directly to the price of gold, and the units traded on the stock market are just like shares.

It offers investors a simple, flexible, low-cost way to invest in gold. The minimum investment for a Gold ETF is usually one unit, equal to 1 gram of gold. You can buy and sell these highly liquid ETFs easily during market hours.

What is the Difference Between Gold ETF and SGB?

Gold ETFs and SGB are two popular ways to invest in gold without buying it physically. The table below explains the key differences to help you choose the right option:

Aspect Gold ETF Sovereign Gold Bond (SGB)
Definition A Gold ETF is a digital way to invest in gold. You buy units on the stock market, and their value moves with gold prices. SGB is a government-issued bond that allows individuals to invest in gold non-physically.
How does it work? You buy units of Gold ETF through a demat account. The value of each unit moves with the market price of gold. You invest a fixed amount in SGB for a set period. Returns depend on the gold price and fixed interest.
Returns Returns depend only on gold price movements. No extra earnings like interest. Returns depend on gold price and an additional 2.5% yearly interest paid twice yearly.
Tax Benefits No tax benefits on the investment amount.
Short-term gains (if sold within 3 years) are taxed as per your income slab.
Long-term gains (after 3 years) are taxed at 20% with indexation.		 No tax on capital gains if held till maturity (8 years).
The same capital gains tax rules as the Gold ETF apply if sold before maturity. 
Interest earned (2.5%) is taxable as per your income slab.
Liquidity Highly liquid. Can be bought and sold anytime during market hours on stock exchanges. Can be traded on exchanges after 5 years or redeemed directly with the RBI after 8 years. Less liquid than Gold ETFs.
Investment Limits No maximum investment limit. Can invest as much as you want. Maximum 4 kg per individual per financial year.
Interest Income No interest is paid on the investment. Fixed 2.5% annual interest on the initial investment, paid every six months.
Safety and Risk Low risk. Regulated by SEBI. No risk of theft, impurity, or loss. Very safe. Fully backed by the Government of India. No storage risk.
Purity Typically valued at 99.5% pure gold (stated like the market companies) The value is directly related to the price of 999 (24K) purity gold (as fixed by the RBI)
Storage  No physical storage required. It is held in demat (electronic) form. No storage issue. It is held in digital or paper form
Issuer Managed by Asset Management Companies (AMCs), which also list on stock exchanges Issued directly by the Government of India through the RBI
Tradability You can trade it anytime during market hours on the stock exchange. You can trade it after 5 years in the secondary market or redeem it with the RBI after 8 years.
Price Transparency Live market prices are available throughout trading hours. The RBI fixes the issue price before each issue based on the average market gold rates.
Lock-in Period No lock-in. Can buy and sell anytime during market hours. Lock-in period of 8 years. Can exit after 5 years if listed on stock exchanges.
Ideal For Investors who want flexibility, easy buying and selling, and market trading options. Long-term investors looking for a safe, government-backed investment with tax savings on maturity.

Advantages of Investing in SGBs and Gold ETFs

Gold investment has moved beyond physical jewellery and coins. Now, people prefer safer and easier options like SGBs and Gold ETFs. Both have their perks. Let's check out the key advantages they offer:

Advantage Sovereign Gold Bond (SGB) Gold ETF
Government Backing  SGBs are issued by the Government of India, making them a highly secure and trusted investment option. Though regulated by SEBI, Gold ETFs are managed by private fund houses(AMCs), not directly by the government.
Additional Interest Income Investors in SGBs receive a fixed 2.5% annual interest on their initial investment, which adds extra income besides gold price returns. Gold ETFs do not pay any interest; returns come only from the rise in gold prices.
Capital Gains on Tax Benefits If SGBS are held until maturity (8 years), no capital gains tax is charged, helping investors save more on long-term profits. Gold ETFs do not have this tax relief. Capital gains are taxable after 3 years.
Multiple Holding Options SGBs can be held both in demat form and as a physical certificate, giving flexibility to those who prefer paperwork or digital records. Gold ETFs can only be held in electronic form through a demat account.
Easy Trading and Liquidity While SGBs have an 8-year maturity, they can be traded on stock exchanges after 5 years, offering some liquidity before maturity. Gold ETFs can be bought and sold anytime during market hours, providing high liquidity and flexibility.
Transparency in Pricing The Reserve Bank of India fixes the issue price based on the average market rate, keeping the pricing clear and fair. Gold ETFs reflect real-time market prices during trading hours, offering complete price visibility.
Ideal for Long-term Goals SGBs are suitable for people looking for safe, long-term investments with steady returns and tax savings on maturity. Gold ETFs work well for those interested in short- or medium-term investments and market trading options.

Disadvantages of Investing in SGBs and Gold ETFs

No investment option is perfect; the same applies to SGBs and Gold ETFs. Let's quickly identify some of the drawbacks that you should consider:

Disadvantages Sovereign Gold Bond (SGB) Gold ETF
Lock-in Period  SGBs have an 8-year maturity period, although early redemption is allowed after 5 years.   Gold ETFs don't have any lock-in period. But if you sell when prices are low, you might face losses. 
Trading Liquidity Low liquidity in the secondary market. It's not always easy to sell before maturity. It's easier to buy and sell than SGB, but sometimes trading volumes drop, making it harder to trade considerable amounts quickly. 
Price Volatility Risk If gold prices go down, the value of your SGB and your returns can also decrease. Gold ETFs are market-sensitive. If you sell when prices are low, you might face losses.
Tax on Capital Gains Before Maturity If SGBs are sold before maturity, capital gains are taxable. You pay long-term capital gains tax if you sell Gold ETFs after 3 years. You pay short-term capital gains tax if you sell them before 3 years.

Tax Implications on SGB and Gold ETF

SGBs and Gold ETFs are subject to different tax rules relating to interest income and capital gains, so it is worth looking at how tax works for both.

  • For SGB, you have an interest rate of 2.5% per annum, which adds to your income and will be taxed according to your tax slab. The capital gain will not be taxed if you hold the capital when it matures. However, if you sell beforehand, the capital gain will be taxable. If you sell SGB after 3 years, you will be taxed at 20%.
  • Tax on Gold ETFs will depend on the holding period. If you sell Gold ETFs within the next 3 years, your profit will be added to your income and taxed as short-term gains as per your income tax slab. After 3 years, you would pay 20 % tax and can claim the indexation benefits. Gold ETFs don't provide tax exemption upon maturity.

Which is Better Between Sovereign Gold Bonds and Gold ETFs?

Both alternatives track the price of gold and are easier to manage than physical gold, but differ in their structure, returns, tax implications, and liquidity.  Below is an overview of the two to assist you in deciding which product is a better fit for your investment strategy:

1. Returns and Yield

  • Sovereign Gold Bonds (SGBs) appreciate the price of gold. They have a yield of 2.5 % per annum, accrued and paid out twice a year.
  • Gold ETFs only provide the increase or decrease in the value of gold and do not provide any yield.

2. Cost and Expenses

  • There are no management fees of any kind for SGBs. They do not have an expense ratio.
  • Gold ETFs have a small expense ratio, decreasing overall returns.

3. Issuer and Security

  • SGBs are issued on behalf of the Government of India by the Reserve Bank of India. They are low-risk, sovereign-backed investment instruments.
  • Gold ETFs are issued instead by mutual fund companies. They are backed by physical gold, which the fund holds.

4. Investment Horizon

  • SGBs are most suitable for long-term investors looking for stable returns with tax benefits.
  • Gold ETFs are better suited for investors who emphasise liquidity and want to invest for the short- or medium-term.

In conclusion, investing in gold today has changed. With options like SGB and gold ETF, investors can now pick modern ways to put money in gold. SGB offers fixed interest along with gold value. At the same time, Gold ETF allows easy buying and selling through the stock market. Knowing their features, tax rules, and returns lets you decide how to include them in your portfolio smartly.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about SGB vs Gold ETF

What is SGB?

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SGB is known as the Sovereign Gold Bond, a government scheme that allows investors to invest in gold without purchasing physical gold. During the maturity period, investors earn a fixed interest and also receive capital gains.

What is a Gold ETF?

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A Gold ETF is a fund that lets you buy gold in digital form through the stock market. It follows the current market price of physical gold. You book profit based on how gold rates move. It's the simple, flexible, and smart way to invest in gold without storage hassle.

What is the difference between SGB and Gold ETF?

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The main difference is how they work and what they offer. SGB offers fixed yearly interest along with gold price returns, while gold ETFS only track the gold price. SGB has an 8-year lock-in period, but gold ETFs can be purchased and sold anytime on the stock exchange.

Should I buy a gold ETF or SGB?

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You can select a Gold ETF if you prefer rapid buying, selling, and liquidity. If you intend to hold long-term, select an SGB because you will get an additional 2.5% annual interest while incurring tax-free returns at maturity. The answer depends on your investment goal.

Can I convert a gold ETF to physical gold?

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Yes, in some cases, you can convert Gold ETFs into physical gold. However, not all Gold ETFs offer this option, and it depends on the specific fund and the amount of ETF units you hold. Some fund houses allow bulk investors to redeem in physical form, but this usually requires a large amount, not suitable for small retail investors.

What is the best alternative to SGB?

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The best alternatives to SGB are gold ETFs and digital gold. Gold ETFs work well if you already have a demat account and want to trade through the stock market. Digital gold is a good choice if you prefer buying small amounts online and want the option to convert it into physical gold later.

Can I sell Gold ETFs anytime?

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Yes, you can sell them during stock market hours. To sell, you will need a demat account and a trading app.

Does the gold ETF pay dividends?

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No, gold ETFs don't give dividends. They only follow gold prices. You make money when the price rises; you sell.

Are there any risks involved in investing in Gold ETFs or SGBs?

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Yes, Gold ETFs carry market risk and price variation risks as mentioned above.  SGBs typically are low risk as the government backs them. However, an SGB sold before maturity can face a price opportunity or a less profitable outcome.

Can I redeem Gold ETFs for physical gold?

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Yes, in some cases, you can redeem Gold ETFs for physical gold. Redemption options depend on the specific fund and the investor's holdings.

Which is better for the long term: SGB or gold ETF?

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For long-term holding, SGB is a better option. Compared with the gold ETF, SGB gives 2.5% interest per year, coupled with tax-free capital gain on disparate funds upon maturity. Gold ETFs may suit shorter-term holders or investors with more flexible buying and selling options.

Can I buy SGB anytime?

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No, you can buy SGBs only when the government opens them for sale. This happens a few times a year. Later, you can buy them from the stock market, but rates may vary.

What are the cons of gold ETFs over SGBs?

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Gold ETFs will not offer a fixed interest like SGBs. Also, the profits received after three years will be subject to capital gains tax. You will also require a demat account to invest in gold ETFs, and you can only earn returns based on changes in gold prices. Gold ETFs provide no maturity benefits and are tax-free like SGBs.

Is a gold ETF safe during a market crash?

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Yes, gold ETFs are safer than stocks during a market crash because gold often holds value. However, their price still depends on factors like market demand, gold rates, and currency changes.

Do Gold ETFs give any fixed interest like SGBs?

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No, gold ETFs track gold's price only. In addition to gold price returns, SGBs pay 2.5% annual interest on the investment value.

Which option is safer: SGB or Gold ETF?

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SGB and gold ETF are both safe options. However, SGBs are supported by the Government of India and give tax-free maturity benefits. This makes them a safer choice for long-term holding.

Does Sovereign Gold Bond offer tax benefits on maturity?

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Yes, if you hold an SGB till its 8-year maturity, you don't pay tax on the capital gains. The yearly interest, though, is taxable.

Do Gold ETFs pay any yearly interest like SGBs?

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No, gold ETFs do not offer any interest payments. Only SGBs offer a 2.5% annual interest on the initial investment.

Can I sell Sovereign Gold Bonds before their full 8-year maturity?

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Yes, you can sell Sovereign Gold Bonds before 8 years. They can be sold on stock exchanges after 5 years from the issue date. But if you sell before 8 years, you might have to pay tax on the profits.

When is the right time to invest in an SGB or Gold ETF?

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Investing in SGB or gold ETF is good when gold prices dip or during periods of price stability. For SGBs, check the RBI's issue calendar to buy during open windows.

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