Gold ETF vs Gold Bond

Investing in gold has long been considered a safe option during times of economic uncertainty. Apart from physical gold, two alternatives are Gold Exchange-Traded Funds (ETFs) and Sovereign Gold Bonds (SGBs). When we discuss the major difference between gold ETF vs gold bond, both offer a great way to invest in gold without the hassle of physical assets, but they cater to different investment goals.

Understanding Gold ETF

A Gold Exchange-Traded Fund (ETF) is an option by which you can invest in gold without owning a physical asset. Gold units represent physical gold and ½ gm of 24 carat gold comprises 1 unit of Gold ETF. You can trade it in at gold's prevalent market price.

You can trade the Gold ETF holdings on either the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE) at a similar price to physical gold's original price excluding any premium. Gold ETFs are a liquid and cost-effective method to gain exposure in the gold market. 

Understanding Gold Bond

Gold Bonds or Sovereign Gold Bonds are securities issued by the government that are denominated in terms of gold. It was launched by the Reserve Bank of India in consensus with the Indian Government in November 2015 and serves as an alternative to gold. It allows you to invest in gold without having to physically own it. 

The minimum investment that is permissible is 1 gram of gold. Gold bonds offer a guaranteed returns of 8% which can be disbursed half-yearly. Investors can purchase gold bonds from some foreign banks and private sector, nationalised banks, Stock Holding Corporation of India Ltd. (SHCIL) and specific stock exchanges. 

Pros and Cons of Gold ETF

Let us explore the pros and cons of Gold ETFs: 

1. Pros:

• ETF pricing is more transparent as it is closer to the market price of physical gold which excludes any premium from the purity of gold, making changes, etc. 
• There is no time bound for investors to be invested in Gold ETFs and they can yield returns for as long as they feel like from the 24-carat gold price fluctuations. These are open-ended mutual funds. 
• You can also invest in Gold ETFs in the mode of a Systematic Investment Plan (SIP). This reduces the cost of bulk one-time investments. If you invest in this mode, you only need to ensure to maintain the necessary amount for auto-debits every month. 
• Gold ETFs are more liquid as compared to sovereign gold bonds as you can trade them in the open market with no lock-in period. You can invest for a short-term, medium-term or long-term as per your objectives. 

Cons:

• There is no fixed return for investing in Gold ETF and the return depends on market fluctuations. 
• Capital gains from Gold ETFs are subject to taxation. 

Pros and Cons of Gold Bond

Gold bonds come with their fair share of pros and cons that are worth considering. Let us take a look. 

Pros: 

1. Gold bonds are considered to be one of the safest long-term investment options if you are looking for a tenure of 5 to 8 years. 
2. The returns from bonds are friendly to taxation. Tax on capital gains is exempted from the amount of redemption on the bond. However, the interest that the investor earns on the bond is taxable. There is no Tax Deducted at Source (TDS) in this case. 
3. You can use sovereign gold bonds as collateral for loans. The ratio of the 'loan to value' by the Reserve Bank of India applies in this case as well. 
4. Investment in gold bonds can be made by anyone – trusts, individuals, universities, charitable institutions and Hindu Undivided Family (HUF). Both singles and holdings can be invested. Additionally, you can assign a nominee as well. 

Cons: 

In Gold ETFs, there is no upper limit to the amount of investment. However, in sovereign gold bonds, you can invest up to 4kgs. 

Sovereign gold bonds have a lock-in period of 5 years from the date of issue of bonds. Only after years, you can trade it in the secondary market. Gold ETFs, on the other hand, have no lock-in period. 

Which One Should You Choose – Gold ETF vs Gold Bond? 

Let us discuss the primary parameters which help you decide who should invest in gold ETF vs  gold bond: 

1. Returns: Both Gold ETFs and sovereign gold bonds depend on the price of gold. If the market price of gold increases, the capital appreciation will benefit both gold ETFs and SGB. However, Gold ETFs do not pay any guaranteed returns. On the other hand, gold bonds pay a guaranteed return at the rate of 2.50% p.a. 
2. Taxation: As gold ETFs are non-equity assets, the capital gains are treated as short-term gains when held for less than a year and are subject to taxation at a marginal rate. If held beyond a year, the gains will be long-term capital gains and subject to a taxation of 12.5%. On the other hand, interest on SGBs is taxable. Additionally, if you hold gold bonds till redemption, the capital gains are free from tax. 
3. Liquidity: You can purchase and sell gold ETFs in the secondary market with your current demat and trading account. On the other hand, SGBs are less liquid than gold funds and are most beneficial when held until maturity.
4. Cost: Gold ETFs have yearly charges, which include brokerage and expense ratios. This ranges between 0.50% and 1.00%. Gold bonds, on the other hand, do not have any ownership cost.

Risk: In the case of gold ETFs, they offer no guarantee but have the physical gold backing with the custodian bank. Although sovereign gold bonds are not backed by physical gold, the returns depend on the gold prices. Additionally, the central government offers a guarantee regarding the interest payable and the gold holding.