There are numerous ways for investors seeking exposure to gold, including Sovereign Gold Bonds (SGBs) and Gold Exchange-Traded Funds (ETFs). While both options offer different characteristics serving various investment goals, dominion which is superior? The current post looks into SGBs and Gold ETFs by exploring such parameters as interest rates, returns, tax impacts, liquidity and flexibility among others that will help you reach a conclusion on what to choose.
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Interest Rates and Returns ON Sovereign Gold Bonds (SGBs)
SGBs payout an unchanging interest rate of 2.5 percent each year is paid on a half-yearly basis. This interest is computed based on the bond’s face value, which is connected to gold price at issuance. Besides the interest earnings, investors also enjoy capital gains that depend on the price of gold at maturity. The combination of constant interest payments and anticipated capital gains renders SGBs attractive to long-term investors who seek both steady income as well as growth potentiality.
Interest Rates and Returns ON: Gold ETFs
Conversely, Gold ETFs do not offer any type of interest income whatsoever and their returns solely rely on appreciation in prices of gold over time. Over time past records indicate that there have been different rates ranging from as low as zero up to over twelve percent depending on good market conditions for periods like three years within these funds having attained such gains through favourable scenarios in trading but one thing investors should note is that these expenses annually charged by them may affect gross returns since they usually range between 0.4% up to 0.8% annually
Tax Implications
The tax benefits of SGBs are considerable. Since they are free from taxation if held until maturity (usually lasting eight years), SGB is seen as a very helpful choice with regard to taxes. If sold earlier than maturity though, capital gains tax will be charged depending on how long they were held for. The interest that accrues on SGBs is subject to income tax in accordance with the slab of the taxpayer.
On the other hand, Gold ETFs face different taxes. For an investor’s income tax slab Gold ETFS gains are taxed with respect to individual income tax slab whereas long-term capital gains for shares held for three years or more is subject to 20% tax rate including indexation benefits which may not be as favourable in comparison with SGBs.
Liquidity and Flexibility
Unlike SGBs, Gold ETFs are more easily tradable since they can be purchased or sold just like normal company stocks on the stock market during the hours when stock exchanges operate. Investors looking for short-term gains from price fluctuations in gold would prefer this characteristic. On the other hand, SGB has a clearly defined duration, and although there is possibility of selling them in the secondary market after some time has passed, their liquidity may not match that of Gold ETFs.
Comparative Performance of SGB Series
The performance of various Sovereign Gold Bond (SGB) series can be analysed based on their issue dates, current values, interest earned, and overall returns. Below is a comparative overview of selected SGB series:
Comparative Performance of SGB Series
| Series | Issue Date | Issue Price (Rs) | Current Price (Rs) | Interest Earned (Rs) | Total Returns (%) |
| Series I | July 2016 | 3,119 | 6,938 | 2.5% per annum (approx. 500 over 8 years) | 120% (approx. 11.96% p.a.) |
| Series II | December 2016 | 3,215 | 6,601 | 2.5% per annum (approx. 450 over 8 years) | 105% (approx. 10.5% p.a.) |
| Series III | March 2017 | 3,000 | 6,500 | 2.5% per annum (approx. 400 over 8 years) | 116.67% (approx. 11.67% p.a.) |
| Series IV | November 2017 | 3,300 | 6,200 | 2.5% per annum (approx. 375 over 8 years) | 87.88% (approx. 8.79% p.a.) |
| Series V | January 2018 | 3,200 | 6,000 | 2.5% per annum (approx. 375 over 8 years) | 87.50% (approx. 8.75% p.a.) |
| Series VI | March 2018 | 3,100 | 6,300 | 2.5% per annum (approx. 375 over 8 years) | 103.23% (approx. 10.32% p.a.) |
Key Insights:
- Interest Rate: All SGBs offer a fixed interest rate of 2.5% per annum, paid semi-annually. This contributes to the overall returns alongside the appreciation in gold prices.
- Current Values: The current prices reflect the market value of gold and vary by series. Series I, for instance, has the highest current price at Rs. 6,938, indicating strong appreciation since its issuance.
- Total Returns: The total returns for SGBs have been substantial, with Series I yielding approximately 120% over its tenure, translating to an annualised return of about 11.96%. This performance is notable compared to other forms of gold investment.
- Maturity and Liquidity: SGBs have a maturity period of 8 years, with the option for premature redemption after 5 years. This lock-in period can be a consideration for investors looking for liquidity.
- Tax Benefits: Capital gains from SGBs are exempt from tax if held until maturity, adding to their attractiveness compared to other gold investments.
Investment Overview and Cash Flow Comparison
To compare cash inflow from investments in bonds of sovereign gold or physical gold an analyst would consider some things such as the initial amount invested, the interest accrued on these Sovereign Gold Bonds and the price increase of both types of investment. A detailed analysis follows.
Investment Overview:
- Sovereign Gold Bonds (SGBs): Assume an investment of Rs. 1,00,000 in SGBs at an issue price of Rs. 3,000 per gram. This would equate to approximately 33.33 grams of gold.
- Physical Gold: The same investment of Rs. 1,00,000 can be made in physical gold, purchasing 33.33 grams at the same price of Rs. 3,000 per gram.
Interest Earned from SGBs:
- Annual Interest:
- Rs. 1,00,000 × 0.025 = Rs. 2,500
- Total Interest Over 8 Years:
- Rs. 2,500 × 8 = Rs. 20,000
Price Appreciation:
- SGBs:
- Assuming the price of gold appreciates to Rs. 6,000 per gram over the investment period:
- Current Value of SGB Investment:
- 33.33 × Rs. 6,000 = Rs. 2,00,000
- Total Returns from SGBs:
- Rs. 2,00,000 + Rs. 20,000 = Rs. 2,20,000
- Physical Gold:
- Assuming the price also appreciates to Rs. 6,000 per gram:
- Current Value of Physical Gold Investment:
- 33.33 × Rs. 6,000 = Rs. 2,00,000
- Total Returns from Physical Gold:
- Rs. 2,00,000
Summary of Cash Flow:
| Investment Type | Initial Investment (Rs) | Interest Earned (Rs) | Current Value (Rs) | Total Returns (Rs) |
| Sovereign Gold Bonds (SGBs) | 1,00,000 | 20,000 | 2,00,000 | 2,20,000 |
| Physical Gold | 1,00,000 | 0 | 2,00,000 | 2,00,000 |
With interest returns, SGB investment has led to another source of earnings thus making total returns to be equal to Rs. 220000 higher than Rs 200000 from physical gold on the assumption that they appreciate at the same value. Apart from capital gain potential, SGB’s also guarantee investors’ salary for they are much desired compared with other kinds of investments dealing with both income-generation and capital growth by workaholics.
Gold Price vs. SGB Value (2017-2024)
Here is a comparison of the gold price and Sovereign Gold Bond (SGB) value from 2017 to 2024:
| Year | Gold Price (Rs/gram) | SGB Value (Rs/unit) |
| 2017 | 3,000 | 3,000 |
| 2018 | 3,200 | 3,100 – 3,300 |
| 2019 | 3,400 | 3,400 – 3,500 |
| 2020 | 4,500 | 4,500 – 4,600 |
| 2021 | 4,700 | 4,700 – 4,900 |
| 2022 | 5,000 | 5,000 – 5,100 |
| 2023 | 5,500 | 5,500 – 5,600 |
| 2024 | 6,000 | 6,000 – 6,300 |
Conclusion:
When it comes to investing in gold, there are several options like SGBs and Gold ETFs; however, the choice of which one is suitable for you solely relies on your investment objective as well as personal preference. SGBs are mostly recommended for long term investors who need consistent returns and tax advantages while Gold ETFs are more practical since one can sell and buy more often. Investors should understand these differences so they can invest according to their respective financial goals.
