Amid a continuous rise in domestic gold prices, the central government has discontinued the Sovereign Gold Bond (SGB) scheme, citing the high cost of borrowing associated with the instrument.
In the global markets, spot gold has been trading above the $2,800 per ounce level, after hitting a record high of $2,830 recently. Gold price in India too recently jumped to an all-time high at Rs 84,900 per 10 gram.
According to Manoj Kumar Jain, director of Prithvi Finmart, gold hit fresh lifetime highs in the international and domestic markets amid global uncertainty due to US trade tariffs.
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“Gold and silver gained amid safe-haven buying and global uncertainty. Gold and silver could maintain their bullish momentum amid global central banks buying and safe-haven demand in the upcoming sessions,” said Jain.
SGBs were considered an attractive investment option, allowing investors to hold gold in a dematerialised form without storage concerns while earning an annual coupon of 2.5 to 2.75 percent.
In the absence of new SGB issuances, investors now have alternatives such as gold exchange-traded funds (ETFs), gold mutual funds (MFs), or purchasing SGBs from the secondary market.
Here’s a look at various digital gold investment options and their pros and cons:
Listed SGBs
Starting in 2015, the RBI has launched 67 SGB tranches, issuing 14.7 crore units. They are listed and traded in the cash segment of the BSE and NSE. Retail investors can buy and sell them through demat accounts.
SGBs are eight-year instruments but impose a five-year lock-in. Although SGBs are listed on the stock exchanges, most of them are thinly traded. However, the RBI provides a buyback facility at the end of the fifth, sixth and seventh years.
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Unitholders can submit their redemption requests during the designated windows through Receiving Offices, NSDL, CDSL, or RBI Retail Direct.
Gold ETFs
The main goal of a gold ETF is to track the domestic physical gold prices. In short, they are based on gold prices and invest in physical bullion. Gold ETFs are units representing physical gold. One gold ETF unit equals 1 gram of gold, backed by high-purity physical gold.
Since gold ETFs are listed, they are quite safe and have higher liquidity. However, there are brokerage charges, but way less than making charges in terms of physical gold or jewellery. Also, the expense ratio in gold ETFs is less than in gold MFs.
Keep in mind that ETFs track the price of gold, so they are subject to volatility. Also, to invest in an ETF, one needs to have a demat account. There are entry and exit loads, and the investor has to pay brokerage every time.
Gold mutual funds
Gold MFs are open-ended funds that invest in units of Gold ETF. The ultimate goal of the mutual fund is to create wealth using the potential of gold as a commodity. Each gold MF has a fund manager who makes investment decisions as per the fund objective.
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The units of gold MFs are priced differently as compared to ETFs. It is in the form of net asset value (NAV) disclosed at the end of the trading session.
Gold MFs are actively managed, so they have the potential to outperform the gold price over time. They also offer the convenience of investing through a mutual fund house. However, gold mutual funds have higher expense ratios than ETFs, typically around 1-2 percent.
Additionally, they are subject to the risk of underperformance, meaning that they could return less than the gold price over time.
Further, gold MFs have low minimum investment requirements compared to gold ETFs, making them more economically accessible for retail investors. Also, one does not need a demat account to invest in a gold MF.
Gold MFs have delivered 29.45 percent returns on a one-year basis, according to data from Value Research.
Which is the best avenue for gold investment?
“Investors will hold on to the gold bonds being traded right now. Listed SGBs are still one of the best ways to invest in non-physical gold. However, new demand will probably suffer after the discontinuation of SGBs. Investors may also fall back on gold ETFs and gold funds for gold investments,” said Harshad Chetanwala, Co-Founder, MyWealthGrowth.com.
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