SGBs & gold ETF remain your best bets on the yellow metal

Some worries have been raised about the cutting back of customs duty on gold lowering the price of the yellow metal and thereby impacting the returns on sovereign gold bonds (SGBs). In fact, it has been alleged the government reduced the customs duty with an eye on bringing down the payout on SGBs. But, unlike what some of these circulating videos are purporting, the returns on SGBs have not fallen by 9 per cent.

SGBs gained popularity among investors given the tax-free returns and nil cost. The interest of 2.5 per cent p.a. is an added benefit. While the lock-in is for 8 years, investors have an option of early redemption after 5 years through stock exchanges. 

Currently, subscribers have two worries – will there be a huge fall in returns and is gold ETF a better option, given that the long-term capital gains tax on gold ETF has been reduced to 12.5 per cent post Budget 2024.  

A study of the SGB returns on July 29, 2024 versus the 52-week high (which was on July 18, 2024 for most of the series) reveals that the current returns are 1-2 per cent p.a lower. For example, some of the 2017 series, which showed 15-16 per cent p.a. returns on the 52-week high are now returning 14-15 per cent p.a. Hence it is wrong to say that 15 per cent return will fall to 6 per cent p.a.

There are series which show higher fall, but this could be due to the premium that these series commanded pre-Budget. SGB premium is driven by demand, trading volumes and time left for maturity of the series. SGB had been in demand prior to the budget due to better taxation as compared to other financial forms of gold. Further low  trading volumes can cause some price spikes leading to high valuation. However, the maturity price of SGB is determined solely on the ongoing gold prices and that is dependent on many  parameters.

Gold prices in India are driven by the import duties as well as international gold prices and the USD-INR currency movement.  Geopolitical events, central bank purchases, inflation, rate cuts are a few factors affecting international gold price movement. Given that the valuation of all other gold investments like gold ETF, physical gold is  based on the domestic price (which is driven by the above factors), SGB remains the best investment in gold due to zero cost, tax free returns and the additional 2.5% interest. 

Gold ETF has now become attractive with the capital gains tax being lowered to 12.5 per cent p.a.. Gold ETF triumphs over SGB on the liquidity front since it can be exited anytime. However gold ETF returns are lower than SGB due to expenses and the interest component being absent in gold ETF. 

Post budget, investors wanting to invest in gold can consider SGB or Gold ETF based on their holding period. Investors who do not want a lock in of 8 years or those preferring to have the option to redeem anytime can consider gold ETF. 

Financial forms of gold are always a better investment due to lower costs and investors should not get swayed by what they hear in social media.