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Indians have a sentimental value attached when it comes to investing in gold. It is the most common choice among Indians everywhere, ranging from building an asset to gifting dear ones or any milestone achievement or as an investment option. Alternatively, people also can invest in sovereign gold bonds issued by RBI. On the other hand, mutual fund investments have gained popularity lately, where they invest in a basket of securities, either equity or debt. In this article, we will understand the differences between Sovereign Gold Bond vs Mutual Fund.

What is a Sovereign Gold Bond?

Sovereign Gold Bonds (SGBs) are government securities denominated in gold, where each unit is one gram of gold. The RBI issues these debt securities on behalf of the government. The SGBs were launched in November 2015 as an alternative to physical gold.

You can invest in SGBs through branches of nationalised banks, scheduled private and foreign banks, authorised stock exchanges and designated post offices. You can also invest online through the authorised bank’s website. The interest on SGBs is 2.5% per annum. The tenure for these bonds is eight years, and you can sell them on the stock exchange after a lock-in period of 5 years.

Upon maturity, the redemption proceeds are automatically payable into your bank account. Also, no tax is applicable on capital gains on redemption proceeds at maturity. However, the interest income is taxable per the income tax slab rates. On the other hand, you can sell the bond in the secondary market before the tenure of eight years, the capital gains are taxable similar to physical gold. Moreover, the purchase and redemption happen in terms of cash and not gold.

The SGB price is calculated as a simple average of the closing price of the last three days’ gold price of 999 purity preceding the transaction period. The gold prices will be denominated in INR. The India Bullion and Jewellers Association Limited publishes the gold prices in INR denomination. 

Who Should Invest in a Sovereign Gold Bond?

Investors who have an affinity toward gold as an asset class can consider investing in Sovereign Gold Bonds. They are low-risk investment options and hence are suitable for investors with low-risk tolerance levels. In addition to the capital appreciation in gold prices, SGB also earns fixed income bi-annually through interest payouts. Moreover, when compared to physical gold, the cost of buying and selling sovereign gold bonds is lower.

Furthermore, investing in SGBs reduces the risk of holding physical gold safely. Therefore, individuals who want to avoid such hassle can consider investing in sovereign gold bonds. The chances of theft are zero as these bonds are held in a demat or paper form. Also, investors with a long term investment horizon can invest in these bonds to make returns. Moreover, they are suitable for portfolio diversification as it acts as a hedge for the portfolio.

Who Should Invest in a Mutual Fund?

Mutual fund investments are suitable for any investors who have a proper understanding of market risks. There are multiple scheme options, across asset classes like equity, debt, and precious metals, available for investors to invest in. However, you must be clear with your requirements and align your investments. Moreover, it enables a regular savings habit through the SIP option, where you can choose the frequency of investment. Also, it provides easy liquidity where investors can withdraw money anytime, especially during financial emergencies. Hence, mutual fund investments are suitable for investors looking to diversify their portfolios and keep risk under control—also as those investors who do not want direct equity market exposure. Furthermore, fund managers who are professionals manage mutual funds where they aim to maximise returns. Historically, mutual fund investments have delivered significant returns to their investors. 

Differences Between Sovereign Gold Bond and Mutual Fund

The following are the differences between Sovereign Gold Bond vs Mutual Fund

ParametersSovereign Gold Bond (SGB)Mutual Fund (MF)
MeaningSovereign Gold Bond is a government security issued by RBI which is denominated in gold. This can be an alternative to physical gold.Mutual funds pool money from investors and invest in a basket of equity or debt securities, offering market-linked returns. 
InvestmentSGBs are issued in units where one unit is equal to one gram. Hence, the minimum investment is one gram of gold, and the maximum is 4 kgs of gold per investor.Mutual funds are also issued in units where the NAV starts with Rs.10. You can invest in mutual funds through SIP or lumpsum mode. Based on your investment amount, you will receive the number of units. The minimum investment is Rs. 500 through SIP and no limit on the maximum amount. 
ReturnsThe returns that investors earn in gold bonds are the same as in gold. However, there is an additional benefit of 2.5% per annum, which is fixed.The mutual fund returns vary depending on the type of fund and market conditions. There are no fixed or guaranteed returns. 
Lock-in PeriodFive years lock-in period.There is no lock-in period except for ELSS funds which are three years. 
PriceThe government determines the issue rate.Every mutual fund scheme is launched at a NAV of Rs.10
Liquidity.You can easily trade these bonds on the stock exchange after a five-year lock-in period.You can exit from mutual funds anytime. However, early withdrawals are subject to exit load charges depending on the scheme. Also, only ELSS funds can be withdrawn after three years.
FeesNo additional charges for investment in gold bonds.Mutual funds charge fund management fees which are usually part of the expense ratio. 
Loan Facility Loans against SGBs are available, and a loan to value is the same as a loan against gold, as mentioned by RBI.Loan against mutual funds is available where individuals can avail of loans up to 50% of NAV in equity funds and 80% in debt funds. 
TaxationThe capital gains tax on redemption is zero. Also, the long term capital gains come with indexation benefits. However, the capital gains for premature redemption are taxable similar to debt. The capital gains tax on redemption is as per equity or debt based on the fund. Only ELSS funds qualify for tax deduction under Section 80C of the Income Tax Act,1961.
How to Invest?You can invest in SGBs through authorised banks and exchanges either online or offline mode. Also, you can apply only through your demat accountYou can invest in mutual funds after completing your KYC requirements. You can purchase through online platforms, AMC websites or distributors. It is not compulsory to hold a demat account. 

Conclusion

Gold is an asset with social and emotional value attached, especially in India. Also, it is the most precious asset that everyone wants to hold. Hence, gold bonds can be an excellent substitute for holding physical gold. 

On the other hand, mutual funds can also be a great investment tool. Honestly speaking, there is no one best investment tool to invest in. Instead, it is advisable to diversify your investment portfolio across different asset classes and not put all the eggs in one basket. Also, this ensures that financial goals can be met irrespective of whether the asset class is performing well. Furthermore, it is better to choose investment tools in combination depending on the investor’s financial objectives and horizon (short term or long term). Therefore, investing in SGBs or mutual funds entirely depends on your financial goals and understanding of risk.  

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