Subscriptions for Sovereign Gold Bonds open – what about ETFs and Mutual Funds
Each bond tracks the price of 1 gram of gold, it’s yours for Rs 4,777 per bond, but should you?Author : Gopal Aggarwal
Today the first tranche of subscriptions for this financial year’s Sovereign Gold Bonds (SGB) begins.
Each bond tracks the price of 1 gram of gold and is set at price of Rs 4,777 per bond. Further, online application and payment gets a discount of Rs 50 per bond or slightly more than 1%.
The icing on the cake for the investors is that interest at the rate of 2.5% paid half-yearly is also guaranteed.
At the time of maturity, the amount equivalent to the value of the gold at the then market price will be given.
Thus, it tracks physical gold, has value same as physical gold (plus interest) but without any access to physical gold.
Now this lack of any access to physical gold can be advantageous or disadvantageous depending upon individual requirements and tastes.
Elaborating on SGB, the bond has tenure of eight years and an exit option after five years. The exit will be on each interest payment date.
Thus SGB lose in liquidity, but make up for it in the extra interest income it provides and in the absence of any management charges.
SGBs are not the only way to invest in gold electronically. ETF (Exchange Traded Funds) on the stock markets and Gold Mutual Funds are other investment vehicles that track the price of physical gold.
And let’s not forget physical gold.
Let us compare all these investment vehicles which match their value to the price of physical gold.
ETFs are traded on the Indian stock markets like any other stock or share and thus theoretically are liquid as long as there is an opposite order as to the one you want to execute.
To help ensure this, the investor is advised to invest in only those ETFs which have high turnover.
The same can be evaluated on National Stock Exchange (NSE) by clicking “EXCHANGE TRADED FUNDS” at Home -> Market Data -> Market Watch -> Equity & SME Market -> Equity/Stock. On the consequent page, sort descending by VALUE and then you can shortlist those which have UNDERLYING ASSET as “Gold”. However, there may be a nominal management charges.
Now, Gold Mutual Funds are technically similar to ETF in that they too track the price of physical gold. With these in comparison to ETFs, an investor is dealing directly with the mutual fund house. These too are generally liquid (make sure your selected scheme is open-ended), but there are specific cut-off timings to submit your deposit and redemption requests.
Now, a word to the wise – Online, digital gold, convenient as it may be and made tempting by discounts, is under the direct control of the governments and the tax department. If due to any reasons, the authorities want to freeze your assets, it won’t take more than one click on their end to block all your assets.
However, physical gold – packing immense value in such a tiny object – cannot be confiscated from you so easily.
Further, physical gold can be used in an emergency situation at any time of the day or night; physical gold can be life-saving in times of wars or other such events.
But, human nature being as it is, no one can be trusted with a valuable asset like physical gold which is a bearer asset. To illustrate, any woman or man who has whatever physical gold in their physical possession can claim ownership of the same.
Gold, unlike fiat currencies, has been used a store of value for more than 5,000 years. Even though, gold is a commodity and does not earn revenue on its own (like companies represented by stock ownership do), still some investment in this precious metal – whether in the form of jewellery, ETFs, mutual funds, or SGBs is something that every individual should consider.