Gold ETFs move in line with gold prices but SGBs while moving in tandem with gold prices also carry a 2.5 percent annual interest (simple interest), which may seem small, but over the years makes a big difference. If one adds the AMC fees and taxation costs, the difference is wide enough to make investors move to SGB.
• The first tranche of Sovereign Gold Bond (SGB) gave returns almost equivalent to equity markets in the last eight years
• SGB has attracted nearly three times more investment as compared to gold ETF
• Returns of SGB are higher than gold ETF on account of interest payment and low cost
• Though SGB has performed well in the medium term, in the long term equity outperforms by a distance
The Indian government’s Sovereign Gold Bond (SGB) has been a success to a large extent. While penetration is still low, the quantum of investment in gold through this route indicates investors are considering SGB as an investment vehicle.
Though Gold Exchange Traded Funds (ETF) were launched in 2011, their assets under management stood at Rs 22,339 crore as of June 30, 2023, while outstanding bonds in SGBs, launched on 30 November 2015 are at Rs 64,650.5 crore, equivalent to 109 tonnes of gold.
Investors flock to SGB rather than to Gold ETFs because of various reasons. SGBs are guaranteed by the government and issued by RBI as compared to ETFs which are issued by Asset Management Companies, and which carry some amount of risk that is related to the fund house.
However, Gold ETFs are more liquid and investors can exit anytime they want as compared to an eight-year lock-in for SGBs with an option to redeem after five years, though liquidity is extremely low in this market.
Source link: How do Sovereign Gold Bonds compare with Gold ETFs and equity indices