Gold FAQs: Gold Bonds and Gold ETFs

Traditionally and since ancient times, we Indians have had an affinity for gold. Or I should put it as the ‘love for gold’. We buy gold all the time. Or at least we try to buy it (just ask the ladies of the house). And mostly, it is in the form of physical gold or ornamental jewellery.

But in recent times, several non-physical forms of gold are gaining popularity. These are your Gold ETFs, Gold funds and more recently, the government issued Gold Bonds (or Sovereign Gold Bonds or SGBs). These non-physical forms of gold bypass all the traditional problems of purchasing physical gold like purity, storage, resale, etc. And hence, they are getting more and more traction these days compared to traditional options like buying gold coins for investments

Many readers have mailed me with questions about these gold bonds and gold ETFs. So I decided to do a list of FAQs for them.

If you are interested in investing in Gold ETFs and Bonds, then you can go through these frequently asked questions.

Q: How is SGB Gold Bond price calculated for the issue price?

The nominal value or issue price of the gold bond is based on the simple average closing price (published by the India Bullion and Jewellers Association Ltd or IBJA) for gold of 999 purity of the last three working days of the week preceding the subscription period. Also, a discount of Rs 50 per gram will be offered on the issue price of the Gold Bonds for those who subscribe online and pay through digital mode. The golds bonds are issued several times a year by the RBI in different tranches that are priced at different levels. To know more about the historical issue prices of these bonds since the start of SGB gold bonds in 2015, please refer to the detailed post titled Gold Bond Issue Price History (Since 2015).

Q: What is the tenure of Sovereign Gold Bonds?

The Gold Bonds have a tenure of 8 years from the date of issue. That is, one needs to remain invested in gold bonds for a period of 8 years. But if you don’t have that kind of time horizon and cannot stick around for 8 years, then you can exercise the early-redemption option after 5 years too. What this means is that you can redeem your gold bonds at the end of the 5th, 6th, 7th and 8th years (only on the scheduled dates for interest payment). So you get an option to exit prematurely after a few years of investment.

Q: Can I exit gold bonds before 5 years?

There is a way to do it. Though you cannot redeem gold bonds before a minimum of 5 years, you still have another option. These bonds are available for sale/purchase on stock exchanges after few days of issuance. Just like the regular equity shares that you can buy and sell on stock exchanges. So if you want, then you can sell the SGB units in the secondary market even before the 5th year. But as of now and as per the latest data, the liquidity of such secondary sale of gold bonds is nothing much to write about.

Q: What is the interest on Gold Bonds?

In addition to tracking gold prices, Gold bonds also offer an additional 2.5% annual interest that is paid semi-annually on the original investment value. What this means is that suppose you bought gold bonds at the rate of Rs 3900. Now the prices have risen to Rs 4300. Then the additional 2.5% interest will be paid to you on Rs 3900 which is the initial investment amount and not the current value of Rs 4300. So gold bonds are the only form of gold investments that offer something in addition to regular capital appreciation. This is a unique feature of these gold bonds.

Q: What are some Gold Bond Tranches

Some of the gold bonds tranches issued earlier are SGBMAR25, SGBFEB27, SGBOCT26, SGBNOV23, SGBJUL27, SGBOCT25, SGBNOV24, SGBSEP24, SGBMAR28X, SGBMAY25, SGBOCT27VI, SGBOCT27, SGBOC28VII, SGBAUG28V, SGBJ28VIII, SGBDEC2513, SGBNOV25, SGBDC27VII, SGBDEC2512, SGBOCT25V, SGBDEC25, SGBNOV26, SGBNOV25VI, SGBDEC26, SGBJAN27, SGBFEB28IX, SGBMAR24, SGBJUN27, SGBNOV25IX, SGBJAN26, SGBNOV258, SGBJUN28, SGBJUL28IV, SGBJUL25, SGBAPR28I, SGBDEC25XI, SGBMAY28, SGBAUG24, SGBSEP28VI, SGBSEP27, SGBFEB24, SGBAUG27, SGBMAY26, SGBN28VIII, SGBOCT25IV. Do check this link on NSE’s site to see how gold bonds issued earlier are trading now. The government of India regularly issues new tranches of gold bonds for fresh purchases. So this list of gold bond tranches gets updated every now and then.

Q: Where can I buy or sell Gold ETFs?

The Gold ETFs are exchange-traded funds and they are listed on exchanges (NSE, BSE, etc. in India) where they can be bought or sold just like shares of companies. So if you want to buy or sell gold ETF units, then you would need to have a Demat account to trade gold ETFs.

Q: How much return can I get from Gold ETFs?

Gold ETF just tracks the price of gold. So apart from any small tracking error, most gold ETFs will provide returns similar to returns of gold. Unlike gold bonds, the gold ETFs do not offer any additional interest income on purchasing and holding ETFs.

Q: What are some Gold ETFs in India?

Some of the prominent gold ETFs that are available for sale and purchase in India are as follows: Axis Gold ETF (AXISGOLD), Birla Sun Life Gold ETF (BSLGOLDETF), Canara Robeco Gold ETF (CANGOLD), HDFC Gold Exchange Traded Fund (HDFCMFGETF), ICICI Prudential Gold Exchange Traded Fund (IPGETF), IDBI Gold ETF (IDBIGOLD), Kotak Gold Exchange Traded Fund (KOTAKGOLD), Quantum Gold Fund (QGOLDHALF), Reliance Gold Exchange Traded Fund (RELGOLD), Religare Gold Exchange Traded Fund (RELIGAREGO), SBI Gold Exchange Traded Scheme (SBIGETS), UTI GOLD Exchange Traded Fund (GOLDSHARE).

Q: What about the liquidity of SGBs and ETFs?

In terms of liquidity, the Gold ETFs are more liquid than SGBs. The trading volumes of large gold ETFs are sufficiently large for comfort and suitable for small investors. On the other hand, the gold bond volumes are very low currently. So if you are looking to sell large amounts of gold bonds in the secondary market, then you might face certain liquidity issues. If you are planning to buy gold ETFs and gold bonds in India, you can do it via Demat or if outside India, then you can buy here similar options in gold.

Q: How are Gold ETFs taxed?

There are 2 types of taxation for the profits generated from gold ETFs. The gains generated from gold ETFs in less than 36 months (or 3 years) are termed as short term capital gains and taxed as per the income tax slab rates of the investor. For long term capital gains (that are generated in more than 36 months), the gains are taxed at 20% with indexation benefits. You may ask as to what is indexation? Indexation adjusts the purchase price of gold for inflation based on the latest CII index numbers. This is helpful in reducing the notional gains from ETF sale and hence, helps lower the tax impact too.

Q: How are Sovereign Gold Bonds taxed?

The taxation of gold bond also has a few different aspects. The first is the interest income. The interest income of 2.5% from gold bonds is added to the total income of the investor and taxed as per his or her individual tax slabs. The capital gains generated (if any) if sold between 5th and 8th year are tax exempted. If gains are generated by selling on exchanges, then a similar 36-month rule is used to identify whether it’s a short term or long term capital gains. If it’s a gain generated in less than 36 months, then it is taxed at one’s tax slab rate. But if the gains are generated in more than 36 months, which qualifies it as long term capital gains, then it is taxed at 20% with indexation. If you want to know more details, then I suggest you do read more about taxation of gold in the detailed post titled Taxation on Gold in India.

Those are some of the questions that many of you investors in SGB or ETF might have. RBI itself has a detailed FAQ on Gold bonds (link).

And how to choose between Gold ETFs and Gold bonds when investing for the long term? I have written in detail about investing in gold for the long term, but in general, if you need to invest in gold for regular tactical investments, then ETFs are better. But if you are investing for long term (i.e. 5+ years), then SGB is better bet. Or for many of you, having a combination of the two can be used for their investment portfolio.

That said, gold ETFs and gold bonds can be part of every sensible investor’s long term portfolio. But don’t be attracted by the recent surge in gold prices alone. Unlike other asset classes that have some intrinsic value (like debt products and stocks/equities), the asset class of gold has no cashflows or intrinsic value attached to it. So you can’t value gold in absence of demand/supply which decide the price of gold at any point of time. Due to this, gold prices follow a sort of pattern which can at times have a lot of volatility. As per historical trends, the gold prices will not move much for many years. But suddenly, they would give high returns for a year or two. At times these up moves are due to some geopolitical or economic recessionary triggers. But whatever it is, this is how gold prices move when looked at from long term perspective. So if you are planning to invest in gold for the long term in your portfolio, you should be willing to digest such price trends. If you are a small investor, don’t be in a hurry to time your gold investments. It’s better to accumulate gold slowly over the years in a regular manner.

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