MFs, SGBs or ETFs? How to pick the right digital gold investment option

For those looking to invest in gold, sovereign gold bonds (SGBs) are superior to gold ETFs and gold mutual funds

Indians love gold, more so on auspicious occasions like Akshay Tritiya, Dhanteras and Diwali. In India the demand for the yellow metal rose 10% to 210.2 tonnes during the third quarter of the calendar year, while the purchase of gold bars and coins touched 55 tonnes in the same period,  the highest since 2015, according to a World Gold Council (WGC) report. 

There are more disadvantages than advantages to holding physical gold such as the risk of theft and loss, keeping it in a safe place, say a locker, attracts further charges. The only advantage of buying gold in its physical form is emotional satisfaction. But now, investors can easily opt for digital gold. Investors have the option of gold mutual funds, gold exchange-traded funds and sovereign gold bonds. 

Gold is also seen as a haven asset during times of geopolitical uncertainty. This is because gold is considered to be a stable store of value, and it is often sought after by investors during periods of crisis. As a result, gold prices may rise when there is economic instability. 

When investing in physical gold, it’s important to note that its resale value can be lower compared to gold bars or coins. You might encounter a premium over the prevailing market rate when purchasing physical gold, and at the time of selling, you could face offers below the market rate. Security is also a concern with physical gold due to the risk of theft, especially when stored at home. That is why, digital gold is recommended if the goal is to invest a bigger quantity.

How much gold should you buy? 

"Retail investors should have less than 10% gold in their portfolio to hedge against unfavourable market scenarios such as wars, prolonged bear markets, and similar market risks. "Given the current geopolitical conflicts and supply chain disruptions, investors can allocate to the yellow metal," said  Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth.

 How to choose between gold mutual funds and gold ETFs?

As per Motilal Oswal,  Gold ETFs are passively managed and reflect the current gold prices without distortions, unlike physical gold prices which vary across India depending on location and the demand-supply dynamic. What’s more, gold ETFs have fewer expenses than buying or selling physical gold. 

Gold mutual funds  invest in schemes that purchase gold ETFs. Gold mutual funds track the value of the units of the gold ETF schemes which in turn reflect the value of physical gold. These mutual funds make money depending on the performance of the underlying asset. Changes in the NAV of gold ETFs units affect gold mutual fund returns.

"If you’re considering investing in physical gold for its traditional significance, it might be prudent to limit your investment size. Other investment avenues may offer more advantages. Gold mutual funds, though not directly tied to physical gold, provide exposure to gold mining companies and gold ETFs. They offer a low entry point, starting investments from as little as Rs 1000 and allow systematic investment through SIPs. However, there might be expenses in the form of an expense ratio and exit load if redeemed within a year. For those seeking to invest in gold gradually, gold mutual funds could be a viable choice," said Adhil Shetty, CEO of Bankbazaar. 

On the other hand, gold ETFs are traded on the stock market, enabling real-time buying and selling during trading hours. Investments can begin with as little as 1 gram of gold, securely deposited in your demat account. While there are annual demat charges, transaction charges for buying and selling gold ETFs are considerably lower than those associated with physical gold. 

"A key point to note is that gold ETF investments do not result in physical gold delivery. If you wish to obtain physical gold in the future, you can liquidate your gold ETF holdings and use the proceeds to purchase gold from the market. The price of gold is also influenced by the international economic landscape. In the medium to long term, gold prices are anticipated to increase due to various factors such as ongoing geopolitical issues, escalating crude oil prices, and inflation," said Shetty. 

Between gold-based active mutual funds and gold ETFs, the latter is more efficient since the expense ratios are far lower, said Gupta. 

 However, systematic investments in gold are more convenient through mutual funds, as you can buy in the multiple of Rs 500 instead of having to spend a variable amount (depending on the price of 1 gm of gold) in ETFs. "If you are one of those who like to automate your investments, mutual funds are the right way to accumulate gold," said Gupta.

Sovereign gold bonds most superior among them all 

For those looking to invest in gold, sovereign gold bonds (SGBs) are superior to gold ETFs. They offer a 2.5 per cent per annum rate of interest over and above the appreciation in the price of gold that these bonds would fetch, and gold ETFs only fetch appreciation in the price of gold. There is a 2.5 per cent extra return from sovereign gold bonds.

" Sovereign gold bonds don't have any ongoing cost of ownership, and gold ETFs have an expense ratio of around 1 per cent. So that's a cost that investors who remain invested in the gold ETFs have to pay. SGBs trump over gold ETFs.SGBs are miles ahead of gold ETFs is taxation. In the case of SGBs, the capital gains you make on the appreciation in the price of the gold is completely tax-free. You only have to pay tax on the 2.5 per cent interest, which gets added to your income and taxed per the slab system. In contrast to that, in the case of gold ETFs, you have to pay capital gains tax on the price appreciation of gold that you achieve, and they are taxed as a non-equity capital gain," explained Value Research in a note.

SGBs, issued by the RBI, are a safe, reliable alternative to holding physical gold.

Advantages as per Value Research:

You can buy SGB from the stock exchange at a discounted price, which means you can buy more for the same amount of money

If you hold SGBs till they mature (eight years), your income is tax-free.

What's more, they ensure a guaranteed 2.5 per cent return every year, which is over and above the price of physical gold. 

The interest, though taxable, is paid equally twice a year, which makes it a compelling option for certain investors.