Sovereign Gold Bonds (SGB) vs. Physical Gold: Which is Better?

Gold is considered one of the most valuable commodities in India, not just economically but also for cultural reasons. Gold ornaments are significant on auspicious occasions, such as weddings, worship, and various other ceremonies.

However, if you are considering buying gold purely from an investment point of view, you should consider investing in digital gold or Sovereign Gold Bonds (SGBs) offered by the RBI. This article will compare SGB vs. physical gold and determine which is more beneficial.

Key Takeaway 

• Physical gold is more favourable than SGB in terms of liquidity because physical gold can be sold at any time, but SGB comes with a five-year lock-in period.
• SGBs have a sovereign guarantee, require no storage cost, and offer a 2.5% interest, while physical gold comes with an additional storage cost.
• SGBs are safer as there is no threat of stealing a sovereign gold bond, while physical gold always comes with a theft risk.
• Physical gold has no limit for investment and is easily available, while SGBs come with a limit of investment and are not easily available.

SGB vs Physical Gold: Quick Comparison

Understanding Sovereign Gold Bonds

Sovereign gold bonds (SGBs) are debt securities or bonds issued by the RBI on behalf of the Indian government. The government decides the issue dates of these bonds. These bonds are released based on units. Each unit represents one gram of gold.

The minimum investment in SGB is one gram. However, the maximum investment depends on the category of the investor. For individual investors and Hindu Undivided Families (HUFs), the maximum limit is 4 kg and for private trusts and other organisations, the limit is 20 kg.

Read More: Sovereign Gold Bond Scheme- Things to Know

In simple words, the sovereign gold bond is gold you own in the form of paper. You get a certificate once you purchase a gold bond. You can buy SGBs from branches of nationalised banks, private and foreign banks, stock exchanges, and post offices. Moreover, you can also purchase these bonds online. 

Benefits of investing in SGBs

Safety and Security

SGBs are not associated with market conditions. So, they offer guaranteed returns. The interest rate is fixed at 2.5% annually per the RBI guidelines. The interest is paid on a half-yearly basis. Notably, this interest rate exceeds the gains/losses from gold price appreciation/depreciation.

Read More: Sovereign Gold Bond Benefits: Key Things to Know

Investing in Sovereign Gold Bonds is also safer than investing in physical gold. When comparing SGB vs. physical gold, you need not protect your SGBs from burglary/theft since you only get a paper certificate, as opposed to physical gold.

Suitable for long-term investment

SGBs have a tenure of eight years from the date of issue. So, if you want a long-term investment with guaranteed returns, you should consider investing in SGBs. In addition, premature redemption is allowed after five years, and you can also sell in the secondary market if liquidity is needed.

Ease of investment

You can invest in SGBs through online platforms as well as offline. The official websites and apps of nationalised and private banks and stock exchanges offer the facility of online account opening and investment.

Collateral for availing of a loan

SGBs can be used as collateral for availing loans. You can avail of loans based on the “loan to value” ratio set by respective banks.

Also Read: How to Take a Loan Against PF?

Disadvantages of investing in SGB

Difficulty in liquidating

SGBs have a lock-in period of five years. It means you will not be able to redeem, transfer, or sell SGBs before the completion of five years from the date of issue. Moreover, if you need money urgently before the completion of five years, you cannot liquidate these investments. When comparing SGB vs. physical gold, this is a disadvantage as physical gold can be liquidated into cash anytime. Also, there is a lag of one day between the application for redemption of SGBS and the credit in the account for most banks. SGBs are available for trade in the secondary market. However, the liquidity available in the secondary market is very low.

Impact of gold prices

If the gold price plummets, there is a possibility that you may suffer losses. Though the number of units remains the same, the volatility in the price of gold impacts the returns. Moreover, redemption on the maturity date involves volatility in returns. The closing price depends upon the average cost of gold for the last three business days before the maturity date.

Understanding Investment in Physical Gold

You can purchase physical gold through bars, jewellery, coins, biscuits, and other physical forms. Starting from the minimum weight of one gram, you can purchase, store, and sell unlimited gold in India. You can purchase gold based on purity from any jeweller in your area. 

Nowadays, you can also purchase gold through online platforms and the official websites of reputable jewellers. As you weigh various factors in the comparison of SGB vs physical gold, one of the differentiating factors is the lack of involvement of a broker or third party when it comes to investing in physical gold. So, you have complete control over the investment process. There are many benefits to owning physical gold.

Read More: The Reasons Behind Gold Rates Fluctuation

Benefits of investing in physical gold

Ease of purchasing

You can visit the jewellery store in your area, determine the purity and price, state the weight, and purchase gold directly. You must submit ID proof if you purchase physical gold in large quantities. Moreover, you can pay through various payment options such as cash, cheque, debit or credit card or UPI to purchase physical gold.

Liquidity

Investment in physical gold is favourable in terms of liquidity. Suppose you need money urgently for any purpose, such as a medical emergency, paying educational fees, or recovering from business losses, you can sell the physical gold and avail the payment of the sold gold immediately as per the market price for the day.

Complete control over investment

If you find that the gold price has significantly risen above your purchase price and reached its peak, you can sell it immediately and book a profit. This way, you get complete control and flexibility if you invest in physical gold.

Also Read: Sovereign Gold Bond vs Digital Gold: Key Differences

Disadvantages of investing in physical gold

Difficulties related to storage and security

With the ownership of physical gold comes great responsibility for storage and security. There is always a risk of theft or burglary. If you purchase a large amount of gold, you must store it securely in your home and keep it away from prying eyes.

Losses while selling

When you purchase a gold ornament, you must pay the “making charges” and the cost of gold based on the total weight. However, while selling, you only get the price based on the weight. You will not be compensated for making charges.

No interest paid

You do not earn any interest on the physical gold you own. The profit entirely depends upon the increase in gold prices over time. Moreover, there is also the possibility of a decrease in prices over time. In this case, if you compare sovereign gold bonds and physical gold, you will get a fixed interest rate of 2.5% if you invest in sovereign gold bonds at any time.

Also Read: Sovereign Gold Bond Scheme– Things to Know

Also Read: Learn How to Buy Sovereign Gold Bond

Key Takeaways

Gold will always remain one of the most important commodities in Indian culture and the principal commodity of global trade. If you are considering diversifying your investment portfolio, you should invest in gold. While deciding between SGB vs physical gold, you must consider your financial goals and weigh the pros and cons of each investment type.

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