Once upon a time, we could buy gold only in the physical form i.e. jewellery, bars or coins.
But, some years back, electronic (or demat) gold i.e. Gold ETF made a debut, which proved to be a far better alternative to invest in gold.
And now, we have gold in the paper form (and demat too) viz. Gold Bond. Does it surpass even the Gold ETF?
Let's explore:
Returns
No doubt, returns is the primary factor when choosing the most appropriate option.
Jewellery, bars and coins are, of course, ruled out due to excessive making charges and margins involved. These take away a huge chunk of your profits. Plus, there may be purity issues, which also will affect your returns. Last but not the least, there is no transparency and consistency as gold prices vary across different cities, and even across different jewellers within the same city.
Both Gold Bond and Gold ETF represent pure gold and the price is linked to the prevailing international price of gold. Thus, basic appreciation (or even the depreciation) is same whether you own ETF or Bond... and, anyday, much better than the physical gold.
The differences, however, are that
a) Gold Bond earns you additional interest income, which ETF doesn't; and
b) Gold ETF has fund management expenses, whereas bonds have zero holding cost.
So, in term of returns, Gold Bond definitely has an edge over Gold ETF.
Liquidity
Many people like gold because, if required, it can easily be converted into cash.
Gold ETFs are traded on the stock exchange. Thus, they are quite liquid, as they can be sold anytime when the market is open for trading.
Gold Bonds too would be listed. However, past experience with other kinds of bonds such as NCDs, tax-free bonds, etc., show that the bonds are normally thinly traded. So, it is possible that you may not find a buyer when you want one, or there is a huge discount on the price.
In short, on liquidity parameter, Gold ETF would probably beat the Gold Bond.
Taxation
There is no difference in terms of taxation. Capital gains in all forms of gold i.e. physical, ETF or Bond would be
a) added to your total income and taxed as per your income tax slab rate, if the holding period is less three years; and
b) tax payable would be 20% (with indexation benefit) after three years of holding period.
By the way, the interest income from Gold Bonds would be added to your total income as 'income from other sources' and taxed as per your slab rate.
IMPORTANT UPDATE: Since the time I wrote this article, Capital Gains on Sovereign Gold Bonds has been made Tax Free if held till maturity. Please read the latest tax updates before investing.
Risk
Again, no difference. If gold prices fall, your loss would be the same, across all forms of gold.
Investment Limit
There is no limit on investment in Gold ETF.
But, investment in Gold Bonds is restricted to 500 grams (i.e. around Rs.13-14 lakhs).
Thus, Gold ETF offers more freedom to invest in gold.
Investment Pattern
Given the uncertain economic conditions across the world, gold prices have been quite volatile in recent times. Therefore, it is prudent to avoid investing large lump-sum amount in gold. Instead, like equities, it makes sense to make small investments over a long period of time.
This is where Gold ETF proves better than Gold Bond; where only lump-sum investment would be possible.
Convenience
Both, Gold ETF and Gold Bond can be bought through the demat account. So, no difference in terms of ease of investment (except that, the demat account may be different if gold bond is listed on the commodity exchange and not on the stock exchange).
All in all, a fairly even battle between the two. So you can take your pick, depending on which parameter is important for you.
However, Gold ETF is an alien concept for most Indians; whereas everyone understands Bonds. Secondly, Gold ETFs come mostly from private entities; whereas Gold Bond comes from the Govt. of India. So, in terms of the corpus collected, my take is that Gold Bonds will easily beat Gold ETFs by a huge margin.
But, some years back, electronic (or demat) gold i.e. Gold ETF made a debut, which proved to be a far better alternative to invest in gold.
And now, we have gold in the paper form (and demat too) viz. Gold Bond. Does it surpass even the Gold ETF?
Let's explore:
Returns
No doubt, returns is the primary factor when choosing the most appropriate option.
Jewellery, bars and coins are, of course, ruled out due to excessive making charges and margins involved. These take away a huge chunk of your profits. Plus, there may be purity issues, which also will affect your returns. Last but not the least, there is no transparency and consistency as gold prices vary across different cities, and even across different jewellers within the same city.
Both Gold Bond and Gold ETF represent pure gold and the price is linked to the prevailing international price of gold. Thus, basic appreciation (or even the depreciation) is same whether you own ETF or Bond... and, anyday, much better than the physical gold.
The differences, however, are that
a) Gold Bond earns you additional interest income, which ETF doesn't; and
b) Gold ETF has fund management expenses, whereas bonds have zero holding cost.
So, in term of returns, Gold Bond definitely has an edge over Gold ETF.
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| Whom are betting upon...Gold Bond or Gold ETF? |
Liquidity
Many people like gold because, if required, it can easily be converted into cash.
Gold ETFs are traded on the stock exchange. Thus, they are quite liquid, as they can be sold anytime when the market is open for trading.
Gold Bonds too would be listed. However, past experience with other kinds of bonds such as NCDs, tax-free bonds, etc., show that the bonds are normally thinly traded. So, it is possible that you may not find a buyer when you want one, or there is a huge discount on the price.
In short, on liquidity parameter, Gold ETF would probably beat the Gold Bond.
Taxation
There is no difference in terms of taxation. Capital gains in all forms of gold i.e. physical, ETF or Bond would be
a) added to your total income and taxed as per your income tax slab rate, if the holding period is less three years; and
b) tax payable would be 20% (with indexation benefit) after three years of holding period.
By the way, the interest income from Gold Bonds would be added to your total income as 'income from other sources' and taxed as per your slab rate.
IMPORTANT UPDATE: Since the time I wrote this article, Capital Gains on Sovereign Gold Bonds has been made Tax Free if held till maturity. Please read the latest tax updates before investing.
Risk
Again, no difference. If gold prices fall, your loss would be the same, across all forms of gold.
Investment Limit
There is no limit on investment in Gold ETF.
But, investment in Gold Bonds is restricted to 500 grams (i.e. around Rs.13-14 lakhs).
Thus, Gold ETF offers more freedom to invest in gold.
Investment Pattern
Given the uncertain economic conditions across the world, gold prices have been quite volatile in recent times. Therefore, it is prudent to avoid investing large lump-sum amount in gold. Instead, like equities, it makes sense to make small investments over a long period of time.
This is where Gold ETF proves better than Gold Bond; where only lump-sum investment would be possible.
Convenience
Both, Gold ETF and Gold Bond can be bought through the demat account. So, no difference in terms of ease of investment (except that, the demat account may be different if gold bond is listed on the commodity exchange and not on the stock exchange).
All in all, a fairly even battle between the two. So you can take your pick, depending on which parameter is important for you.
However, Gold ETF is an alien concept for most Indians; whereas everyone understands Bonds. Secondly, Gold ETFs come mostly from private entities; whereas Gold Bond comes from the Govt. of India. So, in terms of the corpus collected, my take is that Gold Bonds will easily beat Gold ETFs by a huge margin.
