Era of sovereign gold bonds (SGBs) likely be over soon: Two alternative gold investment options for you Over the past two years, only four tranches have been released. Further issuances are likely to be few and far between, if not abandoned altogether. So what is a suitable alternative for investors looking to bet on gold now?
Sovereign gold bonds (SGBs), a popular option among gold investors, may soon fade into history. There hasn’t been an official announcement for the 2024-25 series of SGBs so far. Over the past two years, only four tranches have been released. Further issuances are likely to be few and far between, if not abandoned altogether. So what is a suitable alternative for investors looking to bet on gold now?#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} The absence of SGBs will be felt acutely by investors. It was first introduced by the government in 2015 as an alternative to buying physical gold. The idea was to cut down the heavy import of the yellow metal, and its contribution to the country’s growing current account deficit. To ensure wider acceptance, the government sweetened the offering with multiple concessions. Bonds were offered at a slight discount to the prevailing market price. An interest payout of 2.75% (later 2.5%) was offered on the face value of the bond. Additionally, exemption was offered on the capital gains arising at the time of the bond’s maturity after eight years. This made gold bonds a compelling proposition and investors responded favourably. Bond investors have put in Rs.72,274 crore in 67 tranches of SGBs since 2015. However, with gold prices galloping in recent years, the high maturity payouts to investors have made SGBs unviable for the government.
With no fresh issuances coming through, investors can explore the secondary market for SGBs now. However, experts warn against taking this path. Rajani Tandale, Senior Vice-President, Mutual Fund, at 1 Finance, says, “With new SGB issuances on hold, the secondary market is the only option, but investors should be cautious about premium pricing and low trading volumes.”
If the government does pull the plug on fresh SGB issuances, investors will be left with two alternatives—gold ETFs and gold funds, or digital gold. Neither offers the same benefits as SGBs, but are good options compared to buying gold physically. On the surface, there are some similarities between gold ETFs/funds and digital gold. Both are paperless, allowing you to purchase gold in a digital format. They offer liquidity, transparency in pricing, and convenience in buying and selling. Both are backed by real physical gold, stored in vaults with bank-grade security. Buyers don’t have to worry about their safety and storage. Further, gains on both are taxed at 12.5% if sold after two years, and at investor’s slab rate if sold earlier.
Digital gold costlier, gold ETF safer
Taxation for both options remains the same at 12.5% if sold after two years.
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The units in gold ETFs, offered by mutual fund companies, are backed by physical gold of 99.5% purity. There are currently 17 gold ETFs managing assets of Rs.40,000 crore. Meanwhile, every unit of digital gold is backed by 99.9% purity gold. It is primarily sold by three entities—MMTC PAMP, Augmont Goldtech and Digital Gold India (SafeGold). These firms have tied up with various financial services providers to sell digital gold via their platforms. Prominent jewellers like Tanishq, Senco and Kalyan Jewellers also offer digital gold through similar tie-ups. Customers can open digital gold accounts with the refiner directly or through any of the partner platforms.
Both gold ETFs and digital gold can be bought in very small denominations. However, digital gold holds the edge in this aspect. Gold ETFs can be bought in units for value equivalent to 1 gram of gold (currently Rs.7,300), whereas digital gold can be purchased for as low as Rs.1. In terms of liquidity, both afford easy buying and selling. Gold ETF units can be traded on exchanges on a real-time basis. The investor needs a demat account to house these units. Low trading volumes in some gold ETFs can create distortions in the traded price relative to the NAV, but this can be avoided. “You may opt for gold FoF (fund of funds) and avoid the entire trading hassle, buying and selling directly with the AMC,” remarks Amol Joshi, Founder, PlanRupee Investment Services. Though digital gold is not traded actively, its purchase and sale is at prevailing gold prices. Further, you don’t need to have a demat account to hold digital gold.
Unlike gold ETFs, digital gold can be easily converted to physical gold, like gold bars or coins. Depending on the seller and partner, it can also be swapped for jewellery. Some digital gold platforms facilitate online transfer of gold balance to another account on the same platform, which makes for a convenient gifting option. While investors cannot convert gold ETF amount to physical gold directly, they can use the proceeds to buy it.
The costs incurred in buying and selling are very different. ETFs charge a recurring expense ratio of around 0.5%, deducted from the NAV. Transaction costs also apply on buying and selling, which vary with brokers. Digital gold purchase attracts 3% GST upfront. Some platforms may levy storage costs beyond a certain period. Converting digital gold to physical gold may also attract charges related to delivery and making.
A key difference between the two is in regulation. Gold ETFs fall under Sebi’s direct supervision and, hence, are well regulated. Digital gold is not directly under the purview of any regulatory body. Investors may not be fully safeguarded. This is why experts mostly recommend gold ETFs over digital gold. “While digital gold offers convenience, it carries risks due to lack of oversight,” warns Tandale.
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This story originally appeared on: India Times - Author:Faqs of Insurances
