How sovereign gold bonds are better option than gold ETFs

Written on Tuesday, November 17, 2015
By Mohit Mittal- AVP & Head Fixed Income, Bajaj Capital Ltd.

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Till now, the gold ETF was the best option to invest in gold. It gives investors the profit of gold without any burden of safekeeping and concern of jewelers’ fraud. But, now the Sovereign gold bond scheme has superseded the gold ETF. The gold bond is better than the gold ETF in below aspects:


1. Fixed interest along with capital gains


This is not conceivable with any other form of gold investment. The physical gold investment gives us profit out of the price rise. No price rise, no profit. But the gold bond is the only method of gold investment which gives you interest along with the price rise benefit. Interest rate is approximately 2.75% p.a. payable semi-annually.


Let us understand it by an example-


Suppose you buy 10 units (10 gm) of gold ETF and 10 units of gold bond simultaneously. Since the market rate of gold is around 28,000/10 gm, the price of both these purchases is almost 28,000. After 5 years the market rate of gold goes to the 42,000. In this scenario the value of your ETF investment and gold bond investment would also become almost 42,000. It would be a profit of Rs 14,000 in 5 years. This profit is because of the price rise. It is called as the capital gains. But, in the case of gold bond, along with this capital gain, you would also get interest. The prevailing interest rate of gold bond is 2.75%. So, the interest would be Rs 3,850 [28,000*(2.75/100)*5] in five years. You can see that in the case of gold bond you would be able to earn extra Rs 3,850. Your total profit would be Rs 17,850 (14,000+3,850).Annual return of both the investment will be as follows:


Annual return of Gold ETF = 8.45%

Annual return of Gold Bond = 10.87%


2. No Expenses


The gold ETF management companies charge about 1% of the fund value as the expense. While there are no such charges applicable in Sovereign Gold Bond Scheme.


3. Government Guarantee, No Chance of Default


This feature is very important for conservative investors. The Gold bond issued by government of India is more secure than the Gold ETF.


4. Loan against Gold Bond


The gold bond gives a unique facility. Investors can take loan against the gold bond. It can be used as pledge to get cheap loan from the banks. Like National saving certificate (NSC), the gold bond can be pledged. Banks would readily accept it as a pledge, whereas, the gold ETF and gold bullion can’t be used as the pledge to avail loan from banks. The RBI has restricted banks and NBFCs to lend against the gold ETF and bullion. Till now the loan was given against the gold jewelry. The loan to value ratio of gold loan against jewelry would be also applicable for gold bond.


5. No Need of the Demat Account


The gold ETFs can be invested only though Demat Mode. Whereas, you don’t need a demat account for the gold bond. Investors have to only fulfill the KYC formalities and can keep the gold bond in the paper form. There would not be any additional charge. However, as an investor you have the option to keep the gold bond in the Demat form as well.

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