Gold ETF vs Sovereign Gold Bonds vs Digital Gold: Full Comparison for Investors

Investing in gold is not just limited to purchasing jewellery or gold bullion. For investors, the horizon for investment has expanded, allowing anyone to invest in gold without the need to purchase and store it in lockers or worry about its security.

Investors can choose from several non-physical gold options, like gold exchange traded funds (ETFs), gold mutual funds, sovereign gold bonds, and digital gold. While all the options offer exposure to gold, they differ in terms of structure, returns, liquidity, and tax benefits. Let's compare these investment options to understand the differences between them.

Difference Between Non-Physical and Physical Gold

Before we delve into the details of gold investment options, let's understand the difference between non-physical and physical gold, like gold bullion, coins, bars, and jewellery.

• Physical gold is a tangible asset that you can own and store by yourself.

• Non-physical gold is a digital or paper representation of the gold and is traded electronically or digitally.

When it comes to investment options, there are different types of non-physical gold, like gold exchange-traded funds, Sovereign Gold Bonds, gold mutual funds, gold index funds, and digital gold. Let's understand them in detail in the next section.

Difference Between Non-Physical and Physical Gold

Before we delve into the details of gold investment options, let's understand the difference between non-physical and physical gold, like gold bullion, coins, bars, and jewellery.

• Physical gold is a tangible asset that you can own and store by yourself.

• Non-physical gold is a digital or paper representation of the gold and is traded electronically or digitally.

When it comes to investment options, there are different types of non-physical gold, like gold exchange-traded funds, Sovereign Gold Bonds, gold mutual funds, gold index funds, and digital gold. Let's understand them in detail in the next section.

Types of Non-Physical Gold

Here are the three main types of non-physical gold:

What are Gold ETFs?

Gold ETFs are exchange-traded investment funds that track the market price of gold by holding physical gold of 99.5% purity. They perform like individual stocks and are traded similarly on the stock market or exchange. Instead of investing in the actual metal, you invest in its stocks. When you sell Gold ETFs, you receive cash proceeds based on the prevailing market price, not physical gold.

Each unit of Gold ETF represents 1 gram of 99.5% pure gold, and you can buy or sell them through your demat account at prevailing market prices.

How do Gold ETFs work?

A gold ETF holds assets, such as gold bullion or futures contracts, and the price of the ETF is directly linked to the price of gold. So, for example, if the price of gold increases, the value of your ETF will generally move in line with gold prices. Similarly, as the gold price decreases, so does the value of your ETF investment.

Advantages of Investing in Gold ETFs

• The process of purchasing and selling gold ETFs is the same as that of any equity-based fund. They are much easier to liquidate, whether trading stocks via a stockbroker or a professional fund manager during market hours.

• The entire process is entirely transparent. The prices are publicly visible on the stock exchange, and you can track the changes even on an hourly basis.

• There are no entry or exit loads, so no additional charges are applied when selling or purchasing.

• Except for capital gains tax (short-term and long-term), these assets do not attract any wealth tax, VAT, or securities transaction tax.

• Gold prices are generally less volatile than equities and act as a hedge during market uncertainty.

(Note: Gold can still experience short-term corrections due to global economic trends, interest rate movements, or currency fluctuations.)

What are Sovereign Gold Bonds (SGBs)?

Sovereign Gold Bonds (SGBs) are mandated certificates issued by the Reserve Bank of India on behalf of the Government of India, providing investors with a secure, government-backed digital alternative to physical gold.

Earlier, RBI issued SGBs in periodic tranches, but the scheme was discontinued in 2024. Investors can now only purchase existing bonds via the secondary market. Each bond's value is denominated in grams of gold, and the returns are directly linked to the market price of gold.

Although SGBs are listed on secondary markets, liquidity remains limited. They have an 8-year tenure with a 5-year lock-in, after which investors can redeem early on interest payment dates.

How Do Sovereign Gold Bonds Work?

Each unit equals one gram of gold. Prices are based on the 3-day average closing price of 999-purity gold set by the Indian Bullion and Jewellers Association (IBJA). They offer 2.5% annual interest on the issue price, which is paid semi-annually. This is in addition to potential capital gains if the gold market prices increase. Upon maturity, the payout is calculated similarly.

Advantages of Investing in Sovereign Gold Bonds

• SGBs are among the safest investments, backed by the Government of India, eliminating default risk. The primary risk associated with such investments is market fluctuations, which can cause the gold price to be volatile.

• SGBs offer potential capital appreciation linked to gold prices, which often act as a hedge during economic uncertainty, though short-term volatility can occur.

• They act as a hedge against inflation, as gold prices typically rise when the purchasing power of currency declines.

• Sovereign gold bonds can be accepted as collateral to avail secured loans. As per RBI's LTV regulations, up to 75% of the market value of the SGBs can be availed as a loan from any institution (subject to RBI norms and lender's internal policies).

What is Digital Gold?

Digital gold is a smart way to purchase gold online through trusted platforms or mobile apps. When you buy digital gold, the provider purchases and stores an equivalent amount of 24K gold in a secure, insured vault under your name. You can invest in small denominations, sometimes as little as Rs. 100, and track its value in real-time.

You can purchase digital gold from several trusted platforms and financial institutions that partner with government-licensed gold providers. The three primary providers are: Augmont Goldtech, MMTC-PAMP (a joint venture between the Government of India and Switzerland’s PAMP SA, and SafeGold. These providers supply and store the physical gold in secure, insured vaults on your behalf.

You can even buy digital gold through mobile wallets and payment apps, brokerage and investment apps, and banks and fintech platforms.

How Does Digital Gold Work?

Purchasing digital gold is similar to purchasing physical metal, but without physical possession, and based on your financial health. You can opt for a one-time investment strategy or start a systematic investment plan to create a corpus.

If you purchase digital gold through certified jewellery or digital gold platforms, then you can redeem gold jewellery or coins from the partnered stores. However, if you buy through mobile wallets, banking apps, or fintech platforms, your investment remains in digital form. You can choose to sell it at any time for the current market rate.

Advantages of Investing in Digital Gold

• You can invest online without the need for a Demat account, paperwork, or visiting any physical branch, making it a convenient option for both new and experienced investors.

• Digital gold can be instantly sold online, providing quick access to funds without the need to wait for settlement periods.

• Since all digital gold is 24K (99.5% or 99.9% pure), you avoid issues related to hallmarking or quality that come with physical jewellery.

Sovereign Gold Bonds vs. Digital Gold vs. Gold MF vs. Gold ETF: What's the Difference?

This table gives you a clear idea about sovereign gold bonds vs. digital gold vs. gold mutual funds vs. gold ETFs:

Aspect Gold ETF Sovereign Gold Bonds Digital Gold Gold MF Structure Traded on the stock exchange like a share SGBs are government-backed certificates issued by the RBI Online platform-based purchase of gold units stored by the provider in insured vaults Invests primarily in Gold ETFs Pricing Market-linked, fluctuates in real time during trading hours Issue and maturity prices are published by the Indian Bullion and Jewellers Association (IBJA) Market-linked, based on live gold rates provided by the platform NAV (Net Asset Value) is updated once a day Liquidity Highly liquid; can be traded anytime during market hours Listed on exchanges, but less liquid; cannot be redeemed till 5-year lock-in period ends Moderately liquid; buy/sell possible anytime, but settlement depends on platform processing Less liquid; transactions processed at end-of-day NAV Expense Ratio Generally lower expense ratio Zero expense ratio No formal expense ratio, but platform charges (spread, storage fees) apply Slightly higher expense ratio, as it includes ETF and fund management costs

Read More: Physical Gold Loan vs. Digital Gold Loan: What's the Difference?

SGBs, Digital Gold, ETFs and Gold Mutual Funds: Which One Should You Choose?

Choosing between Gold ETFs, Sovereign Gold Bonds (SGBs), Digital Gold and Gold Mutual Funds will largely depend on your investment goals, risk appetite, and how you want to gain gold exposure in your investment portfolio. Each option provides a different way to gain exposure to gold prices while balancing liquidity, cost, and convenience:

• Choose Gold ETF units if you prefer lower costs, higher liquidity, and direct trading.

• Opt for Gold Mutual Funds for professional management through a fund house and SIP-based investing.

• Select SGBs for long-term gold investments with capital gains and tax benefits.

• Pick Digital Gold to invest online in gold without managing physical gold or having a Demat account.

Digital gold is a good starting point before moving to ETFs and gold mutual funds, or for investors preferring short-term gold exposure. Apart from non-physical gold assets like Gold ETFs, SGBs, and digital gold, investors can also explore thematic gold funds. These funds invest in global gold mining and refining companies, providing exposure to the broader gold industry rather than physical gold prices.

To Conclude

Gold ETFs, Gold Mutual Funds, Sovereign Gold Bonds, or Digital Gold are a type of non-physical gold, but they differ in terms of liquidity, returns, and market risks. Keeping the risk factor and structure aside, all these assets provide the opportunity to get gold exposure and capital appreciation linked to domestic gold prices.

If you hold physical gold assets, then gold loans also offer a quick way to monetise them without selling your gold. With Poonawalla Fincorp, you can avail of a Gold Loan of up to ₹50 Lakhs at competitive interest rates starting at just 11% per annum.

FAQs

What is the minimum amount to invest in each option?

Digital Gold starts from ₹1 (some platforms ₹100). Gold ETFs and SGBs require at least 1 gram of gold. Gold Mutual Funds usually need ₹1,000 for lump sum or ₹100 via SIP.

Can SGBs be redeemed early?

Yes. SGBs have an 8-year maturity, but you can redeem them with RBI after 5 years on interest payment dates. They can also be sold anytime on stock exchanges, though liquidity and prices depend on market demand.

What are the tax implications of digital gold, gold ETFs, and SGBs?

If you hold SGBs until maturity, you do not pay tax on capital gains, but the interest is taxable. Gold ETFs and digital gold are taxed like other capital assets. Short-term gains are added to your income, while long-term gains are taxed at a fixed rate. When you buy digital gold, GST also applies.

Are digital gold investments protected like SGBs or ETFs?

No. Digital Gold is not formally regulated by SEBI or RBI; it’s offered via private platforms and stored by vault providers. Gold ETFs are regulated by SEBI under mutual fund rules.
SGBs are sovereign instruments issued by the RBI, making them the safest option.

Which is a better short- and long-term instrument for investment in gold?

Digital gold or a gold ETF is better for the short term, as they are very liquid and have easy buy-sell options. SGBs are for a long-term investment where investors can get fixed interest with professional management of their assets, capital gains exemption at maturity, and inflation-beating returns according to the individual investment style.