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A Comparison Between Sovereign Gold Bond and Physical Gold

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Published Date: 19 Feb 2024Updated Date: 17 Jan 20256 mins readBy MOFSL
Sovereign Gold Bond Vs. Physical Gold

 

Introduction:

Gold has been a symbol of wealth and a store of value for centuries, making it a popular choice for investors looking to diversify their portfolios. In the modern era, investors have various options to consider when it comes to investing in gold. Two prominent choices are Sovereign Gold Bonds (SGBs) and physical gold.

What are Sovereign Gold Bonds (SGBs)?

Sovereign Gold Bonds (SGBs) are government-backed securities denominated in grams of gold. They allow you to invest in virtual gold without buying or storing it in the physical form. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. As an investor, you can subscribe to these bonds during specific issuances and hold them in dematerialised form in your Demat accounts.

Recently, on 12 February 2024, the RBI launched SGB 2023-24 Series IV at an issue price of Rs. 6,263 per gram. You can subscribe to the public issue before Friday, 16 February 2024. 

If you’re confused about whether to invest in SGBs or physical gold, this article presents a comprehensive guide to help you compare the two options and make the right investment choice.

Features and benefits of SGBs

Below are the benefits of investing in SGBs:

  • No making charges

One of the primary disadvantages of investing in physical gold is the making charges it attracts. Making charges on physical gold may range from 10% to 50%, depending on the jeweller and the jewellery. On the other hand, SGBs involve zero making charges as they are issued in dematerialised form and are credited directly into your Demat account.

  • No GST charges

Another benefit of investing in SGBs is that they are free from Goods and Services Tax (GST). On the other hand, physical gold attracts a GST of 3% on the value of gold. Besides, a GST of 5% is levied on the making charges. Cumulatively, these taxes can compromise your overall returns.

  • Asset appreciation like physical gold

By investing in SGBs, you can enjoy asset appreciation just like physical gold. They can be traded on the stock exchanges, and their values appreciate in proportion to the increase in domestic gold prices. 

  • Additional interest income

Apart from capital appreciation, SGBs offer an additional perk in the form of fixed interest income at a 2.5% per annum rate, typically paid semi-annually. It sets them apart from physical gold, which generates no interest income.

  • Safety and security

Being government-backed, SGBs are considered relatively safer investment instruments than physical gold, which can be susceptible to theft or loss. Additionally, the storage of physical gold can be a hassle while you can store SGBs in your Demat accounts.

  • High liquidity

SGBs offer liquidity to investors. You can sell them anytime by placing a sell order on the stock exchanges. In the case of physical gold, you can only sell it at a jewellery shop, which may not be a feasible option.

SGB vs Physical Gold – An illustration

Let’s understand the investment amount and returns you can generate through investments in SGBs and physical gold with the help of an illustration. Suppose the current domestic gold rate is Rs. 6,300 per gram. 

 

Quantity

Investment Amount

Making Charges

GST on Gold Value

GST on Making Charges

Total Investment Value

SGBs

10 grams

Rs. 63,000

Nil

Nil

Nil

Rs. 63,000

Physical Gold

10 grams

Rs. 63,000

Rs. 6,300*

Rs. 1,890

Rs. 305

Rs. 71,505

*Assuming 10% making charges

As you can see in the table above, investing in SGBs is cheaper than investing in physical gold. It means that the former can generate far better returns in the long term.

Things to consider while investing in SGBs

Below are a few factors you must keep in mind while investing in SGBs:

  • Investment goals

SGBs can be a prudent option to fulfil your investment goals. However, keep in mind that returns are not guaranteed and are dependent on domestic gold prices.

  • Risk tolerance

SGBs are government-backed securities and, hence, entail fewer risks. They can be a good option for those preferring asset safety and capital appreciation.

  • Investment horizon

SGBs are best suited for investors with a long-term investment horizon. Usually, SGBs come with an initial maturity period of eight years. If you can hold your SGB investments until maturity, you can enjoy tax-free returns.

To conclude

To summarise, SGBs are potentially better investment instruments than physical gold. They offer higher liquidity, security, and tax-free returns. So, why wait? Open a free Demat account with Motilal Oswal and invest in SGBs today.

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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