Skip to main content

Sovereign Gold Bonds versus Gold ETFs

 With a fresh tranche of sovereign gold bonds on sale, it's a good time to review how these instruments stack up against the earlier favourite, gold exchange traded funds or ETFs. Just based on returns and taxation, the bonds seem better.
 

Sovereign gold bonds (SGBs) are issued by the Government of India. The issue price for the fourth tranche of Sovereign Gold Bond Scheme, opening on July 18 and closing on July 22, has been fixed at R3,119 per gram. One can buy a minimum of 1 gram and a maximum of 500 grams. In comparison, gold ETFs are sold based on net asset value (NAV) through the exchanges. These NAVs currently start below R500 (per unit). Both SGBs and Gold ETFs, which help you to hold gold in paper form have big advantages over physical gold. They don't have purity issues, they don't force you to shell out hefty locker rents and they offer liquidity at prevailing gold prices without ad hoc deductions for wastage or losses.

 

Advantage SGB
But having said this, how do SGBs compare to ETFs? One area where the SGBs score over gold ETFs is the sovereign guarantee. The government guarantee, a good marketing ploy, is applicable both on the redemption amount and on the interest. Gold ETFs are offered by private sector AMCs and do not have that kind of advantage. But do note that the sovereign guarantee here does not shield investors' capital from volatile gold prices. Both the value of your SGB and the value of your ETF swing up and down with market prices of gold during your holding period.

 

Secondly, SGBs pay you an assured interest over and above the price returns on gold. Gold ETFs do not give you that comfort and rely only on price returns. Gold bonds offer 2.75% per annum (paid half-yearly) on the initial investment. Thus, investors earn returns linked to the gold price (just like in gold ETFs) plus a fixed annual interest income. The tenure of gold bonds is 8 years but exit options are available in the 5th, 6th and 7 year.

 

SGBs are cheaper to own than gold ETFs too. This is because gold ETFs charge management charges of up to 1% of their net assets every year. But gold bonds do not have any such recurring charges.

 

Tax sops for gold bonds
Thirdly, there is a tax advantage on SGBs too. Budget 2016-17 has exempted the redemption of these bonds by individuals on maturity from capital gains tax. No TDS is applicable on the interest earned from those bonds.

 

Gold ETFs, on the other hand, are treated as non-equity investments. Therefore, short-term capital gains on units held for less than 36 months are added to investor's income and taxed as per the applicable slab rate. Long term capital gains on units held for more than 36 months are taxed at a rate of 20% after providing for indexation benefits on costs. Gold bonds get indexation benefit if they are transferred before maturity.

 

Given that SGBs score over ETFs on these three counts, will the gold ETF assets in the MF industry see a shift to these bonds? Chirag Mehta, senior fund manager - alternative investments, Quantum AMC, says: 'That kind of shift is not happening right now. Gold bonds are a new product and investors are still learning about them. An issue about gold bonds is that they are not on-tap. Investors have to wait for the government to sell a new tranche. You cannot go and buy them whenever you want. Also, some investors prefer to buy smaller denominations than a gram which can be done via gold ETFs, but not gold bonds.'

 

Gold bonds and gold ETFs are listed on exchanges, which means you could exit them in the secondary market if you require the money before maturity. The redemption will be done at the prevailing price at the market. However, gold ETFs have better liquidity (than SGBs). They register far higher volumes than gold bonds at present. The liquidity issue is a major one. The exchange bid-ask spread for SGBs, a relatively new instrument with a short trading history, is pretty high compared to gold ETFs.

 

Gold ETF performance
If you are betting on SGBs or gold ETFs for price appreciation though, you are likely to get similar results. While gold ETFs have sparkled recently, their long term performance has been unimpressive. Their 5-year returns are in 6.3-6.5% p.a. range as on June 30.

 

'Investors should choose based on their liquidity requirements. If liquidity isn't important and investors can hold to maturity, gold bonds are superior. If investors feel they may need liquidity, ETFs are superior

-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saver Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

-----------------------------------------------

Popular posts from this blog

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now