I have been invested to some extent in gold, but not physical gold. To me, physical gold is not an investment but an expense since emotion gets attached to jewellery purchase. I had done a comparison between various gold funds and ETFs before narrowing down on Axis Direct Gold fund as my primary choice for gold. That said, I had picked up Sovereign Gold Bonds (SGBs) in IPOs sporadically as well.
ETFs and mutual funds offer easy liquidity for people who do churn their portfolio from a gold standpoint. For me, I did it for convenience of setting up SIPs in the Gold Fund. I have not exited gold at any point for rebalancing so I have no reason to not park funds via the SGB route either. Before I do my usual tabulation of analysis results, here is a brief list of features on SGBs:
It is the safest of all the e-gold options, since it is issued directly by the Indian Government, and is backed by physical gold
It is always issued to retail investors at a INR 50/- discount to issue price, and it has a holding period of 8 Years
It pays 2.5% annual coupon on the original issue price (not the retail price) - it is paid twice a year (basically 1.25% each time)
It is traded in NSE and BSE if you want to exit - BUT Some of the issues have really low liquidity, so exit isn't always as smooth
There is zero long term capital gains when you hold it to maturity
There is a cap of 4kgs equivalent of gold per fiscal year a single investor can invest in.
Without further ado, here is XIRR (internal rate of return) of SGBs compared with Axis Direct Gold Fund and Gold ETFs for the same holding period
​ | SGB-SGBNOV25VI* | Nippon India Gold ETF | Axis Gold Direct fund |
XIRR - Analysis I | 14.7% | 11.8% | 12.5% |
​ | SGB - SGBAUG28V** | Nippon India Gold ETF | Axis Gold Direct fund |
XIRR - Analysis II | 2.52% | 1.48% | 2.05% |
*Issued on 6-November-2017 - so that is the date of investment for all comparisons for the first analysis
**Issued on 20-August-2020 - so that is the date of investment for all comparisons for the second analysis
Analysis above includes the coupons paid every 6 months for SGB to compute the XIRR. The close price for SGB has been used to compute XIRR as of 28-Feb-2023. NAVs for ETF/Fund have been used as of the investment dates and 28-feb-2023 respectively as date of entry and date of exit.
In summary, my suggestion is to pickup Gold mutual fund over ETF for liquid investments in gold. But if you are like me and seem to hold gold as a balancing item in your portfolio, do consider parking funds in SGBs. It definitely gives you higher returns than the other options. You can pickup the same from secondary markets too if you want lower maturity periods, if available (given liquidity is low). Given the zero capital gains tax, it definitely is an attractive option.