How Sovereign Gold Bonds fare among non-physical options to invest in yellow metal
Investing in gold is gradually gaining popularity due security and higher return compared to traditional savings instruments. With the advent of digital platforms, investors are shifting to non-physical gold options like Sovereign Gold Bonds, Gold ETFs and Gold Derivatives.
Gold is one of the most popular and safe investment options as its value is expected to rise over time, thus, ensuring lucrative returns in the long-run. Nowadays, investors are not only investing in the physical form of gold but are also considering the non-physical investment options that provide several perks. One such option is investing in Sovereign Gold Bonds (SGBs) that are backed by the government.
However, people often question how these investments fare compared to other non-physical yellow metal investment options. If you are considering investing in Sovereign Gold Bonds or other forms of non-physical gold, we have got you covered.
What are Sovereign Gold Bonds?
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The SGBs are issued by the Reserve Bank of India (RBI) and reflect the current price of physical gold. Though the SBGs have a maturity period of eight years, it allows investors to exit after completion of five years. The SGBs not only provide the investor with value appreciation gains but also ensure 2.5 per cent interest rate per annum on investment. Therefore, it is an appealing non-physical yellow metal investment option for investors.
However, are other non-physical gold investment options better? Well, let's see what benefits or risks other gold investment instruments offer.
Gold ETFs compared to SBGs
Gold ETFs are traded like any other exchange-traded funds and directly linked to the domestic price of physical gold. It represents investments equivalent to physical gold on paper in a dematerialised form. It can be traded on the NSE and BSE just like a company's stock. One unit of Gold ETF is equal to one gram of physical gold and the ETF is backed by gold of very high purity. However, it doesn't provide any interest like SGBs and just offers capital appreciation returns. On the other hand, Gold ETFs offer liquidity options, which SGBs lack.
Gold Funds vs Sovereign Gold Bond
Gold funds operate mainly in the stock market and invest in the companies that deal with gold. Investing in gold funds can be tricky and risky as they don't operate on the physical gold's value but invest in companies operating in the yellow metal. Therefore, it is subject to being affected by market volatility.
On the other hand, SGBs are backed by the government and are pegged against the value of physical gold, making it a safer investment option. Moreover, the assured 2.5 per cent return on investment in SGBs gives it an edge. Compared to SGBs, Gold Funds may offer higher returns if the company stocks perform exceptionally well.
Gold Fund Of Funds
Gold fund of funds are mutual funds that invest in gold ETFs. It is ideal for those who want to invest in gold ETFs, but don't know how to deal with it. However, even in this case, returns aren't better than SGBs as gold ETF prices are based on physical gold prices and provide only capital appreciation returns.
Gold derivatives operate like any other derivative and are linked to the current price of gold or futures of gold as an underlying asset. Since it considers futures of gold, it can be an appealing investment option. It offers liquidity to investors that SGBs don't. However, they're risky as gold prices fluctuate from time to time and gold derivatives could see a slump in price in case the market crashes. If you are looking for a secured return, SGBs are a better option compared to gold derivatives.