Before investing, knowing if a gold ETF or sovereign gold bond is preferable can be helpful. Before making an investment, consider whether a gold ETF or sovereign gold bond would be preferable.
Investors are frequently uncertain about Sovereign Gold Bonds and Gold ETFs. The RBI will once more begin the second series of the Sovereign Gold Bond Scheme on August 22. This will accept investments through August 26. The question now is: Is a gold ETF or sovereign bond a better investment? If you are wondering the same thing, we have a thorough answer for you right here.
Investment cap for both products
Investors can begin investing in Sovereign Gold Bonds and Gold ETFs with a price per gram of gold. In addition, there is no upper restriction on investment in gold ETFs. In other words, you can invest however much you like, however you can only invest a maximum of 4 kg of gold in sovereign bonds per fiscal year.
Simple to purchase
Anytime during the designated time for cash trading on the Stock Exchange, you can purchase or sell Gold ETFs (NSE). However, the RBI occasionally issues the Sovereign Gold Bond on behalf of the government. Thus, you are unable to sell it whenever you like. The maturity of a sovereign gold bond is eight years. However, there is a sale option, or exit option, for the bond in the fifth, sixth, and seventh years. Those who purchase this bond in Demat form can also sell it at any moment during trading hours on the stock exchange. If you are an investor who feels that you can withdraw your money at any time, then a gold ETF would be a better choice for you in this circumstance.
Demat Account Required
A Demat account is required to purchase gold ETFs. Nevertheless, for sovereign gold bonds, a Demat account is not required. Yes, you must purchase the bond in Demat form in order to trade sovereign gold bonds on the exchange, and a Demat account is required for this. You have the choice to purchase Sovereign Bonds in both physical (certificate) and Demat form during the subscription process.
Which one carries a higher chance of loss?
For the government, the RBI issues sovereign gold bonds. Therefore, there is no chance of default. Gold ETFs, on the other hand, are released by mutual fund house businesses. There is a very small chance of default in this situation.
What level of interest?
Interest is paid on sovereign bonds at a rate of 2.5 percent annually. It must be paid every six months. The remaining interest and the principal are paid at maturity. The amount of interest is taxed. You do not receive interest on Gold ETFs at the same time. That is, the Sovereign Gold Bond is a better instrument if you want interest income and the advantages of an increasing gold price.
Brokerage fees
Mutual fund companies charge an investor a total expense ratio (TER) rather than managing gold ETFs. The broker is required to pay a brokerage fee each time you buy or sell a unit. As opposed to sovereign gold bonds, which do not incur such additional costs. You will indeed have to pay a brokerage fee if you purchase or sell sovereign bonds on the exchange. The Sovereign Gold Bond may also be used as collateral for a loan from the bank, if necessary. However, gold ETFs do not offer this capability.
Tax burden
You won’t owe tax on the return if you redeem the Sovereign Gold Bond when it matures. However, gold ETFs do not receive this tax benefit. Taxes on gold ETFs are comparable to those on debt funds. In terms of liquidity, gold ETFs are always available for purchase and sale on the stock market. Consequently, there is no liquidity issue at hand. However, a Sovereign Bond cannot be redeemed until at least five years have passed. However, early redemption will result in lost tax advantages.
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