Investor Corner/The asset classes/Real Assets: REITs, InvITs and Gold
2.5.5 Ways to Own Gold
Gold can be owned as physical jewellery, sovereign gold bonds, gold ETFs or funds, and digital gold. Sovereign gold bonds and gold ETFs are generally the cleanest options for pure investment purposes.
Comparing the main routes
Physical jewellery carries high making charges and storage concerns, and it is rarely the most efficient route for pure investment purposes, though it obviously serves other personal and cultural purposes as well. Sovereign gold bonds, issued by the government, pay a small annual interest on top of tracking the gold price, and offer specific capital gains tax benefits if held to maturity. Gold ETFs and gold Fund of Funds track the gold price closely and trade with reasonable liquidity, without the interest payment SGBs offer.
Physical gold (jewellery, coins, bars) is the traditional route. It offers tangible possession but comes with significant drawbacks: making charges on jewellery (10-25% of the gold value), storage and insurance costs, risk of theft, purity concerns for coins and bars purchased from unreliable sources, and high transaction costs when selling (jewellers typically buy back at a discount to the prevailing rate). The GST on gold purchases is 3%. For investment purposes, physical gold is the least efficient option.
Gold ETFs and gold mutual funds track the domestic gold price. Gold ETFs trade on the stock exchange and require a demat account; gold mutual funds (which are FoFs investing in a gold ETF) can be bought like any mutual fund without a demat account. Both carry expense ratios (typically 0.10-0.50% for ETFs, slightly higher for gold FoFs due to the double-layer structure). They eliminate storage risk, purity concerns and making charges, making them the preferred route for investment-grade gold exposure.
Where digital gold fits
Digital gold, sold through various apps and platforms, allows buying small quantities of gold that are held on the investor's behalf by the provider. It offers convenience for very small or frequent purchases, though it generally lacks the same level of regulatory oversight as ETFs or SGBs, which is worth weighing before relying on it for a meaningful allocation.
Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold, issued by the RBI on behalf of the Government of India. They offer 2.5% annual interest on the initial investment value (paid semi-annually), in addition to the gold price appreciation. The interest is taxable at slab rate, but capital gains on redemption at maturity (8 years) are completely exempt from tax. This tax exemption makes SGBs the most tax-efficient way to hold gold for an 8-year holding period. There is no storage cost, no making charge, no counterparty credit risk (it is a sovereign obligation), and no GST on purchase.
The drawback of SGBs is liquidity. They are listed on stock exchanges and can be sold in the secondary market, but trading volumes are thin, and the market price can deviate from the underlying gold value. Early redemption is allowed after the fifth year on specified dates, but full flexibility is not available before maturity. For investors who can commit to the 8-year holding period, SGBs are clearly the best gold instrument available in India. For those who need liquidity, gold ETFs or gold funds are the pragmatic alternative.
Choosing between the cleaner options
Between sovereign gold bonds and gold ETFs, the choice often comes down to a trade-off between the SGB's extra interest and tax benefit if held to full maturity, versus the ETF's greater flexibility to buy and sell on any given day without being tied to a specific bond's issue and maturity schedule.
How PriLytics helps. PriLytics tracks sovereign gold bonds and gold funds together in one view, so your true gold exposure across different forms is always clear. See your true asset allocation.
Digital gold, offered by fintech platforms through partnerships with gold custodians, allows buying gold in very small amounts (as low as ₹1). The purchased gold is held by the custodian and can be sold back through the platform. While convenient, digital gold lacks the regulatory oversight of SGBs, ETFs or mutual funds. There is no SEBI regulation, and the investor depends on the platform's and custodian's financial health. For meaningful gold allocation, regulated instruments (SGBs, ETFs, gold mutual funds) are strongly preferred over digital gold. Digital gold may be suitable for very small, casual purchases but not for a serious portfolio allocation.