Gold surely holds a special place in every Indian’s heart as well as in our Portfolio. For generations, gold has been more than just an ornament. Whether it’s a wedding gift, a festival tradition, or a safety net during crisis, gold has stood as a symbol of trust and stability.
With gold prices rising, investor interest in gold is back in focus. But unlike in the past, where buying physical gold was the default choice for many, investment in physical gold through jewellery, coins, or bars is not the smartest option considering the high prices, storage risks, and risks of haircut in sell value.
Today we explore two of the efficient and safer ways to invest in Gold — Gold Funds and Sovereign Gold Bonds. We understand how they work and compare between the two to help you understand what suits you based on your investment goals.
What are Gold Funds?
Gold Funds or Gold Mutual Funds are schemes that primarily invest in Gold ETFs. These ETFs (Exchange Traded Funds) in turn, track the domestic price of Gold in India by investing in Physical Gold.
Gold Funds allow you to invest in Gold without buying or storing physical gold. You can invest in Gold Funds through Lump Sum Investments and SIPs that start from as low as ₹100 which makes it ideal for those who want to invest in Gold with a small amount.
Features of Gold Funds
- Gold Funds are easy to invest. You do not need a demat account to invest in Gold Funds
- You can invest as low as ₹100 in Gold Funds thereby allowing investment opportunity for those who want to invest small amounts
- Gold Funds are easy to redeem as there is no lock-in period present. You can redeem as early as on the next day in case of emergencies
- Gold Funds are highly liquid as all other Mutual Funds
Limitations of Gold Fund
- Gold Funds do not track the gold price completely as there is tracking error present
- Expense ratio of Gold Funds are higher than Gold ETFs; further increasing the gap between the actual gold returns and returns provided by the Gold Funds
What are Sovereign Gold Bonds (SGBs)?
Sovereign Gold Bonds (SGBs) are bonds issued by the RBI and backed by the Government of India. The value of SGB is linked with the actual price of Gold allowing investors to earn actual returns of the Gold by investing in them.
Each unit of the bond represents 1 gram of 24K gold, and the rates are also decided based on the average of the closing prices of Gold provided by IBJA (India Bullion and Jewellers Association). Additionally, investors earn 2.5% per annum in form of interest – credited semi-annually over and above the returns of the gold.
The Government of India has discontinued SGB with last fresh issue of SGB announced in Feb 2024. Therefore, investors looking to invest in SGBs can only invest in them by purchasing the SGBs in the secondary market.
Features of SGB
- SGBs carry sovereign guarantee making it the safest option for investment in Gold
- Investors can earn additional interest of 2.5% p.a. over and above the gold returns
- Capital Gains on SGBs are tax-free if they are held till maturity and more than 1 year. Interest is still taxable
- You can get an option to exit these bonds prematurely from 5th year of issue
Limitations of SGB
- Fresh issues of SGBs have been discontinued. You can invest in SGB only by buying it from the secondary market
- SGBs trading in the secondary market may trade at a premium to its actual intrinsic value requiring more research before investing
- Lock-in period of 8 years makes SGBs attractive only for investors with long term horizon
- In case if you need to exit SGBs early, liquidity in secondary market can pose an issue
Snapshot Comparison
| Point of Comparison | Gold Funds | Sovereign Gold Bonds (SGBs) |
|---|---|---|
| Minimum Investment | ₹100 | 1 Gram of Gold |
| Charges | Expense Ratio | Trading Charges |
| Liquidity | High | Low |
| Lock-in Period | None to Minimal | 5 – 8 Years |
| Taxation | LTCG @12.5% if held > 24 months; else as per slab | Tax-Free if held till maturity or sold through RBI’s premature redemption window; taxable otherwise |
| Demat Account Required | No | Yes |
| Returns Earned | Close to actual gold returns | Actual Gold Returns + 2.5% Interest |
Final Verdict: Which one should you choose?
Gold remains a timeless asset, but as you understood through this article, how you invest in it can make a difference today.
So, while Physical Gold adds value if you want to use Gold, Gold Funds and Sovereign Gold Bonds are far more efficient and practical options for investment in Gold. Both cater to different kinds of investors, so:
Choose Sovereign Gold Bonds (SGBs) if:
- Your investment horizon is 5–7 years
- You can research about bonds available at discount or fair value
- You want to earn an additional interest of 2.5% p.a. and earn tax-free returns
- You are comfortable with low liquidity and want to stay invested till maturity
Choose Gold Funds if:
- You want a simple and a hassle-less option to invest in Gold
- You want to invest in Gold through SIPs or with a small amount
- You want high liquidity and flexibility
- You don’t have a demat account
Disclaimer
The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable.
Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security.
The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment.
The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733.
Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
