Sovereign Gold Bond Vs Physical Gold: Which One Should You Pick?

With gold prices today ranging between Rs 74,000 to Rs 74,500 per 10 gm in India, every consumer must be thinking about how to add this precious metal to their portfolio. Gold is a great avenue for investment as can be seen by the popularity of the metal amidst surging prices all over the world. However, it is important to consider the type of gold you want to invest in. 

Primarily, you can invest in either physical gold or sovereign gold bonds (SGBs). There are other forms of gold investment available as well, however, these two options remain the most popular and convenient form of investment in the yellow metal. When it comes to gold investment, there is no right or wrong, the choice of gold depends on your financial goals and needs. So let’s do a comparison of investing in gold bonds and physical gold, be it in the form of biscuits or jewellery. 

Physical Gold 

The lure of gold in the form of jewellery or even a biscuit or coin is never ending. The touch, feel, and beauty of physical gold has been a centrepoint of the Indian culture and is visible when we dedicate specific days as auspicious to buy the metal and gift it to our loved ones. Even from investment point of view, it might make sense for you to go for physical gold if the pros and cons align with your perspective. 

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Pros Of Physical Gold

• Liquidity - Gold in physical form provides great liquidity for the investor. It can be bought and sold with great ease at any jewellery store or bank or lending institution, in exchange for an easy access to cash. Liquidity represents the ease with which you can trade your assets for cash in the market. 
• Global Acceptance - The recognition that gold enjoys is on a worldwide scale and adds to the value of your investment. This helps an individual to not only deal in gold as an investment but also secure their future financial needs by simply taking their jewellery with them. 
• Emergency - If you find yourself in an unfortunate situation, it might not be ideal to go to the bank or the ATM and take out cash to manage the sudden circumstances. Physical gold helps provide that security in an emergency. This is the reason why Indian women have relied on keeping their gold jewellery with themselves as a security option to cash in to should any unforeseen situation arise. 

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Cons of Physical Gold

• Maintenance - Physical gold needs to be maintained in the sense of safety. It might not be the safest option to keep your gold jewellery at home. You will have to avail a bank’s locker or safety deposit box services to minimise the risk of theft or misplacement. 
• Purity - If you are not buying gold from a reputed or well known dealer, you might be putting your investment at risk. To ensure that your gold is unadulterated and has the standard markings, it is advisable to conduct business with well known jewellers or brands.
• Making Charges - While going to a branded gold jeweller ensures the quality of your purchase, the making charges levied on the finished products often account for nearly 30 per cent of the overall cost. Even at local jewellery shops, these charges can range anywhere from 5 per cent to 20 per cent. These making charges are non-redeemable as when you go to sell your jewellery, the charges will not be returned to you, further you might have to take a reduced value of your product in cash, depending on the making and purity.
• Income Generation - Selling your gold biscuit or jewellery will provide you cash, however, the metal generates zero income sitting in your bank locker or home. Since jewellery has such sentimental value in India, people don’t sell it for profit unless circumstances demand. Thus, your physical gold doesnt give you any interest or other income unless it is sold in the open market. 

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Sovereign Gold Bond

SGBs are securities backed by the government. These are denominated in multiples of grams of gold, with the minimum investment starting from one gram of gold. The time period of the bonds is eight years, with the option to exit after the 5th year available to the investors. These are stored electronically in your demat account. 

Advantages Of SGBs

• Low Maintenance - Since SGBs are stored electronically and are backed by the Indian government, they are very low maintenance. You don’t have to worry about theft or keeping them in a bank somewhere or keep checking on them to see if things are alright. This helps add to the charm of the bonds as an investment avenue.
• Return Guarantee - SGBs provide their investors with a fixed annual interest rate of 2.5 per cent, along with the gains to be realised after the bond matures or the investor exits. This not only provides a steady stream of return for your investment, but also protects you against market fluctuations.
• Tax Gains - You don’t have to pay taxes on the capital gains made from the SGBs if you are able to hold on to them till maturity. This helps save taxes and provide an easy way to reduce your tax liability.
• Loans - SGBs can be used as collateral for loans and can help secure an easy access to credit. They are widely accepted across the banking sector. 

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Disadvantages Of SGBs

• Lock-In Period - These securities come with a lock-in period of 5 years, impacting your access to the money. So if you are low on liquidity, SGBs might not be your best option as your access to the funds will be restricted till the lock-in period concludes.
• Less Liquidity - While SGBs are very safe investment tools, they are pretty low in the liquidity. These bonds can be traded on the secondary market after the lock-in period is completed, but it might take you longer to sell these securities at the wanted price.
• Interest Tax - While your capital gains from the bond will not be taxed, the interest payable under the SGB is liable to taxation as per the law. Therefore, it might limit your gains and make you question the return on your investment.
• Unpredictability - A SGB is a very safe investment tool, however, if luck is not on your side, by the time your bond matures, gold prices in the market might be on a downward trajectory. This will severely affect the value of your investment and might render the bond a useless avenue for you.

Therefore, it is important that you pick the mode of investment based on your fiscal goals, liquidity, and risk appetite. You might consider adding both these forms of gold to your portfolio for diversification, but ensure that all the decisions regarding investment are taken after due consideration keeping in mind your future goals and needs.