Are you planning to buy gold this festive season? If yes, then you should know that you can invest in gold in various forms. These include physical gold, exchange-traded funds (ETFs), and Sovereign Gold Bonds (SGBs) in India.
You should choose between these options wisely (and according to your needs) as each has specific features and drawbacks associated with it.
Physical gold
Being a tangible asset, which can be worn or displayed, one always has an emotional attachment to physical gold, and it is easy to buy. You can buy it in the form of jewellery or gold biscuits and coins from jewellers. Other than from jewellers, gold coins are also available with banks and other financial institutions. Though there is no limit to buying physical gold, you should always keep proofs of the investment for tax purpose. However, the resale value of physical gold (especially when it is in the form of jewellery) is always lower than other forms of gold. Risk of theft and purity can be a concern for physical gold. Some may also incur storage costs for safekeeping of the asset.
Gold exchange-traded funds (ETFs)
These are exchange-traded funds which can be bought and sold on exchanges. Since the benchmark of gold ETF is physical gold price, you can buy it close to the actual price of gold. To buy gold ETFs you need to have a trading account and a demat account. Unlike physical gold, which come with high initial buying and selling charges, gold ETF costs much lower. Because ETFs are held in electronic (demat) form, there is complete transparency in the holding of an ETF. However, holding ETFs could be expensive, in terms of expense ratio (or the fund management charges of ~1%) and brokerage costs. You could also incur incremental costs of obtaining a trading and demat account if you are not already holding one.
Sovereign Gold Bonds (SGB)
These are Government securities issued in multiples of one gram of gold. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and are traded on an exchange. These can also be used as collateral for taking loans. Along with most benefits of ETFs, the highlighting feature of SGBs is that they are eligible for an annual interest (around 2.5% or as fixed by the RBI at the time of issue) on the issue price. However, liquidity can be a bit of concern as the bond has a tenor of 8 years. Also, the lock-in period is for five years. You can only withdraw money from the 5th year on the date on which the interest is payable.
The bottom line
While each of the available mediums have their own advantages and disadvantages, choosing the right option depends upon individual needs. SGBs gain over the other 2 options as it has an added interest inflow, ETFs are great in terms of liquidity and with physical gold you can flaunt around your jewellery.