What Are Alternatives To Sovereign Gold Bonds (SGB)?

Due to unpreceded rise in gold prices, the Sovereign Gold Bond scheme has proved to be a heavy burden for the central government

The Sovereign Gold Bond (SGB) scheme was launched in 2015, with the goal to reduce expenses related to gold imports. While investors have benefited immensely, the overall redemption burden on the government is estimated to be more than Rs 200,000 crore. As gold prices are likely to increase further in the coming years, the government may not issue any new Sovereign Gold Bonds.

What is Sovereign Gold Bond scheme?

In the Sovereign Gold Bond scheme, investors buy bonds that are equal to the market price of gold. These bonds are denominated in grams of gold. It ensures that investors can benefit from the rise in the prices of gold, without having to hold physical gold. This simple process had made the Sovereign Gold Bond quite popular among people who were looking to buy gold from an investment perspective. The fact that it was backed by government guarantee made the Sovereign Gold Bond even more attractive. Moreover, investors also benefitted from the 2.50% interest paid on the amount invested.

In 2015, gold prices were quite stable. That is why the Sovereign Gold Bond scheme was considered a game changer. However, things changed dramatically as gold prices increased sharply in the last few years. While investors were overjoyed, the redemption burden ballooned for the government. Due to this reason, the government has not issued any new gold bonds in FY 2024-25. And it is unlikely that any new Sovereign Gold Bond trenches will be announced anytime soon.

What are alternatives to Sovereign Gold Bond?

As new Sovereign Gold Bond units are unlikely to be issued, folks planning to invest in gold have to look for suitable alternatives. One option is to invest in physical gold  such as coins, bars and jewelry. However, holding physical gold has security risks and there can be significant charges for its safekeeping. Liquidity can also be an issue, as selling gold at the market price can involve a lot of paperwork. Let us take a look at some other safer alternatives.

Gold Exchange-Traded Funds (ETFs) – These mutual funds exclusively target investment in physical gold. Each unit represents a specific quantity of gold, typically 1 gram. This is something similar to the Sovereign Gold Bond scheme. ETFs are traded on stock exchanges such as NSE and BSE. There is no need to buy physical gold and you can sell these ETFs anytime you want. But while you would have received interest payout under SGBs, there is no such option with gold ETFs. You only benefit from the appreciation in the value of gold.

Gold Mutual Funds – These are open-ended funds that focus on investments in gold ETFs. Investors can benefit from appreciation in gold prices, without the need to hold physical gold. Gold mutual funds have good liquidity and you can choose easy SIPs, as per your budget.

Digital gold – Some entities like MMTC-PAMP allow investors to hold gold in electronic format. This is safer, as investors are not required to hold physical gold. Investors benefit from appreciation of gold prices, although short-term and long-term taxes are applicable.

Gold savings schemes – Some jewelers like Tanishq or Kalyan Jewellers allow customers to invest in gold via monthly installments. At the end of the plan period, customers can get gold or cash equal to  the value invested. Returns are based on the market price of gold.

DISCLAIMER – This article is for informational purposes only and does not constitute financial advice. Always conduct your own research or consult a SEBI-registered professional before making any investment decisions. Investments are subject to market risks.