SGBs vs gold ETFs vs gold FoFs: Which one to pick for Dhanteras 2024?

The festive period surrounding Dhanteras and Diwali is when many investors prepare to purchase gold, which is seen as a symbol of wealth and prosperity. While most people tend to buy gold bars, coins, and jewelry, some are turning to alternative gold investment options such as Sovereign Gold Bonds, gold ETFs, and Gold FoFs.

Among these options, Sovereign Gold Bonds (SGBs) are considered the best way to invest in gold, according to research conducted by Value Research. They are safer, offer tax-free returns at maturity, and provide a yearly return of 2.5% above the price of gold.

However, as there are no new issuances of Sovereign Gold Bonds, investors can now purchase them from stock exchanges. The increased demand for gold during the festive season may also influence their prices.

Experts have earlier said that investors should be conscious while buying SGBs from the secondary market. 

In the absence of any new SGB tranche, investors are left with options of Gold ETFs and Gold FoFs. Gold ETFs are mutual funds that concentrate on acquiring gold. Fund companies purchase gold from both domestic and international banks, storing the precious metal in their secure vaults. Subsequently, they introduce these gold holdings to the stock exchanges as ETFs, issuing units that reflect the physical gold in their possession. Therefore, investors who acquire these ETFs are essentially obtaining a stake in the gold reserves safeguarded by the fund.

Gold Fund of Funds (FoFs) opt to invest in Gold ETFs instead of possessing physical gold. This means that FoFs gain exposure to gold indirectly. The positive aspect of this approach is that as the price of gold ETFs is closely linked to the actual price of gold, the profits generated from gold FoFs also vary in accordance with gold prices. Additionally, as FoFs operate similarly to traditional mutual funds, individuals are not required to have a demat account and can invest directly through the fund houses.

Which one to go for?

Gold ETFs are suitable for individuals with a demat account who are interested in occasional gold investments. Conversely, gold FoFs operate similarly to traditional mutual funds and allow for SIP investments, making them a suitable choice for those looking to invest regularly in gold without a demat account.

In the market, there are up to 17 Gold ETF schemes available. The average one-year returns for these schemes were around 29.12%, with the 3-year and 5-year returns standing at 16.93% and 13.59% respectively. Among these, LIC MF Gold ETF provided the highest returns across all time periods, with 1-year returns at 29.97%, 3-year returns at 17.47%, and 5-year returns at 13.87%.

Recently, Zerodha Mutual Fund introduced the Zerodha Gold ETF Fund of Funds (FoF), an open-ended scheme that primarily invests in units of Gold Exchange Traded Funds (ETFs).

“Investors favour investing in gold ETFs due to liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. The heightened activity in these funds is also driven by the prospects of an interest rate cut by the US Federal Reserve in the coming months,” said Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics.

Redeeming gold ETFs is simpler compared to gold mutual funds. Gold ETFs are traded on stock exchanges, allowing for the buying and selling of units at any point during trading hours. In contrast, redemption of gold mutual funds can only be done at the end of the day, and new units can be purchased by applying to the fund house.

Investing in Gold FoFs can be expensive due to the two layers of fees involved: one for managing the fund of funds (FoF) and another for the underlying exchange-traded funds (ETFs) in which it invests.