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The gold standard of investing: Choosing between ETFs, SGBs, and physical gold this Dhanteras

India’s deep-rooted relationship with gold, symbolizing both wealth and security, is universally recognized. With Indian households holding over 25,000 tonnes of the yellow metal, our nation remains the world’s second-largest consumer of gold, a status especially celebrated during festivals like Diwali and Dhanteras.

Today, as gold prices in India reach record highs of ₹80,070 per 10 grams, many investors are evaluating the most effective ways to invest in this precious metal. Global geopolitical tensions and economic shifts are pushing up prices, offering Indian investors options among physical gold, Gold Exchange Traded Funds (ETFs), and Sovereign Gold Bonds (SGBs), each with distinct benefits and considerations.

Gold ETFs: A Flexible, Liquid Option

Since their introduction in 2007, Gold ETFs have become an accessible investment option for those wanting exposure to gold without physically holding it. Gold ETFs eliminate issues related to storage, purity, and theft, while providing flexibility and transparency through exchange trading. These qualities have made ETFs increasingly popular among retail and institutional investors.According to AMFI, net assets under management for Gold ETFs surged by 59% to ₹38,166.13 crore in Q2 of FY-2024. Inflows have grown by 88% since January, reaching ₹1,232.99 crore in September, underscoring the growing appeal of ETFs. Their transparency and alignment with global prices make them a cost-effective and liquid investment.

Key Benefits of Gold ETFs:

  • Liquidity: Traded on stock exchanges, allowing flexible entry and exit.
  • Cost-Effective: Reduces costs associated with storing and insuring physical gold.
  • Security: Backed by physical gold stored in regulated depositories.

For investors seeking short-term flexibility and convenience without the logistics of physical storage, Gold ETFs are a compelling choice.

Sovereign Gold Bonds (SGBs): Phased Out Due to Rising Redemption Costs

Introduced in 2015, SGBs were initially designed to provide investors with a government-backed investment that combined gold price appreciation with a 2.5% annual interest. They were attractive for long-term investors due to tax-free capital gains if held until maturity.
However, with gold prices soaring, the government opted to discontinue the SGB scheme, realizing that rising prices would significantly increase its redemption costs. To fulfill maturing bonds at market prices, the government would face substantial outlays, potentially impacting fiscal stability. This decision comes as the second-year issuance of SGBs nears maturity, with gold prices nearly doubling over the past eight years. As a result, the government has announced the premature redemption of 30 tranches issued between 2017 and 2020, set to take place between October 2024 and March 2025.

With SGBs no longer available, investors may find that Gold ETFs offer similar exposure to gold while providing added flexibility and liquidity.

Physical Gold: A Tangible, Cultural Asset

Despite the popularity of Gold ETFs and the previous appeal of SGBs, physical gold retains a special place in Indian households. Valued for its tangible nature, inflation hedge, and as a means of preserving wealth across generations, physical gold represents both security and legacy. However, owning physical gold also presents storage and purity challenges, along with risks of theft, making it less efficient compared to other gold investment options.

With prices projected to rise to ₹2,00,000 per 10 grams in the next five years, the costs associated with physical gold could soon become prohibitive for many. This trend has also sparked global conversations on whether a return to the “gold standard” is viable for stabilizing economic value.

Key Considerations of Physical Gold:

  • Cultural Value: Rooted in tradition, often passed down as family wealth.
  • Storage Challenges: Requires secure storage and involves higher risks.
  • Lack of Financial Returns: Does not yield dividends or interest like Gold ETFs.

While physical gold holds unmatched sentimental value, Gold ETFs offer practical financial benefits that align with modern investment needs.

Conclusion: Which Gold Investment Option is Right for You?

As India’s economy continues to evolve, the choice among physical gold, and Gold ETFs depends on individual goals and timelines. Physical gold remains essential for traditionalists valuing tangibility, while Gold ETFs provide flexible, efficient alternatives without storage concerns.

With the recent discontinuation of SGBs, investors may look toward Gold ETFs for liquidity and market alignment. By balancing cultural values with financial needs, today’s investors can make informed choices that maximize returns while managing risks.

(The author is Tejas Khoday, Co-founder and CEO, FYERS. Views are own)