Difference Between Sovereign Gold Bond (SGB) vs Mutual Funds

For years, Indians have relied on gold as an investment option. Gold often comes in the form of jewellery and holds financial and sentimental value. Nevertheless, as times change, our choices for investments also change. These days, many people are exploring investment avenues like SGB and mutual funds to diversify and grow their wealth.

SGB allows one to hold gold in some form without the physical aspects, while mutual funds are a type of investment that pools money from multiple investors to purchase a diversified portfolio of stocks and bonds. This article will discuss both options and will assist you in determining which one fits your financial journey.

SGB is a government-issued bond that tracks the market price of gold. It allows people to invest in gold without owning physical gold. In this scheme, you buy a bond representing a certain quantity of gold, each equal to one gram of gold.

The Reserve Bank of India (RBI) issues these bonds on behalf of the government. SGBs pay a fixed interest of 2.5% per year on the invested amount. The bond has a maturity period of eight years, but you can sell it after five years on the stock exchange. You get tax-free capital gains at maturity, but the yearly interest is taxable.

How Does SGB Work?

With SGB, you can invest in gold without the hassles of buying and storing gold. It is a safe, government-guaranteed scheme that provides interest income and an opportunity for profits from rising gold prices. The process is as follows:

• In the issue period, you buy SGBs from banks, post offices, or online.
• Each bond is equivalent to one gram of gold and offers a fixed interest of 2.5% annually.
• The RBI issues these bonds for the government.
• An interest of 6% is paid every 6 months. At the end of 5 years, you can sell these bonds on the stock exchange or keep them until maturity (8 years) for a tax-free return.

A mutual fund is an investment structure that pools money together from a large number of people and is managed by a professional fund manager. The pooled money is invested in various asset classes, such as stocks, bonds, or other securities, to grow the capital or earn returns.

Investors hold mutual fund units, and the unit price will fluctuate based on the performance of the investments. Mutual funds are a viable option for people who want to invest but don't want to buy their stocks and bonds individually and prefer to let experts make their investment decisions, buy and sell securities, and manage their money.

How Do Mutual Funds Work?

Mutual funds simplify investing by allowing the money to be managed by experts and determining where to invest.

• Open an account with a mutual fund company or through an online investment platform.
• Select a mutual fund based on your risk tolerance, expected returns, investment purpose, and available budget.
• Your money becomes units representing a share of the mutual fund's total holdings in gold. Its value increases or decreases as the market price of gold fluctuates.
• You can determine the value of your units (NAV) at any time by looking online or at your accounting statements.
• If you sell before 3 years, you will be taxed as per your income slab, or after 3 years, you will be taxed at 20% with an indexation allowance applied.

Who Should Invest in SGB?

• Investors who want a low-risk, steady return without worrying about daily market fluctuations.
• Investors who wish to find a safe, long-term asset tied to the price of gold without the hassle of buying physical gold.
• Investors who want to hedge against inflation and sometimes uncertain economic conditions. 

Who Should Invest in Mutual Funds?

• New investors are looking for an easy and guided way to start investing.
• Individuals aiming to build long-term wealth through compounding.
• Those who prefer professional fund management over doing their own research.
• Investors are comfortable with contributing small amounts regularly.
• People who want the flexibility to track and withdraw their investments anytime.
• Anyone seeking investment options across various risk levels, from low-risk debt funds to high-risk equity funds.

When is SGB better?

• If you want a safe, long-term option with fixed returns, SGB is a better pick.
• It offers 2.5% annual interest plus extra profit if gold prices increase.
• You don't pay any fund management fees, so your full money stays invested.
• It helps you with tax savings as capital gains are tax-free after 8 years.
• It's perfect for people who can lock their money for longer without quick access.

When is the Mutual Fund Better?

• If you want more liquidity and the option to redeem at any time.
• If you want to invest small amounts through SIP or a lump sum.
• When you do not want to manage any physical gold or demat accounts.
• If you would like a short- to medium-term investment in gold.
• When you want exposure to the movement market with no lock-in period.
• When you need the flexibility to either switch or redeem on an instant basis through fund houses.
• If you are okay with paying fund management fees (expense ratio) for ease.

Whether you lean towards SGB or mutual funds, each option offers something valuable. SGB provides a stable, government-backed approach with the security of gold and guaranteed returns. Mutual Funds, however, offer the flexibility of professional management and the potential for higher growth.

Ultimately, both can play a significant role in a well-rounded investment strategy, and the choice comes down to how much control, risk, and flexibility you are comfortable with.

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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.