Mohit Mehra

← Writing  / Debt & Fixed Income

If you want gold in your portfolio, you have three main choices: Sovereign Gold Bonds, Gold ETFs, and physical gold. Each behaves differently, and the right one depends on your time horizon, tax situation, and whether you can stomach locking money away. The short version, SGBs were the best financial instrument, Gold ETF is now the practical default, and physical gold is mostly jewellery masquerading as investment.

What you are actually buying in each case

With a Gold ETF, you buy units on the stock exchange that represent physical gold held by the fund. One unit typically equals 1 gram. The fund holds the gold in a vault, you hold the paper claim. The price tracks the domestic gold price closely, with a small tracking error.

With an SGB, you buy a government bond whose value is denominated in grams of gold. The RBI issues it, and at maturity after 8 years, you get back the value of gold in rupees, plus 2.5% annual interest on the original price, paid every six months into your bank account. The capital gain at maturity is completely tax-free.

With physical gold, coins, bars, or jewellery, you are holding the metal itself. The price you buy at includes a dealer margin or making charges. There is storage risk. And when you sell, there is a spread between buying and selling price that quietly costs you.

The SGB situation has changed

The RBI suspended new SGB issuances in 2024. This is important to understand. If you want to invest in SGBs now, you cannot buy fresh tranches directly from the government. You have to buy existing SGBs from the secondary market on BSE or NSE, and that means dealing with liquidity, spread, and pricing that may or may not match fair value.

Some existing SGBs trade at premiums, some at discounts, depending on the series, time to maturity, and market conditions. The secondary market exists and functions, but it is not the frictionless experience of buying fresh from the government at the issue price.

I wrote about this in my gold investing post, SGBs were my top recommendation for a long time. The 2.5% interest on top of gold price appreciation, combined with zero capital gains tax at maturity, made them objectively the best way to own gold. That equation still holds for people who can find SGBs at reasonable secondary market prices and are willing to hold to maturity.

Full comparison across what matters

The tax math is what really separates them

Let me make this concrete. Suppose gold goes up 60% over 8 years and you invested ₹5 lakh.

With a Gold ETF held for 8 years, your ₹5 lakh becomes ₹8 lakh. You owe LTCG tax of 20% on the gain of ₹3 lakh (after indexation it would be less, let us say your net tax is ₹40,000 as a rough estimate). You walk away with roughly ₹7.6 lakh.

With an SGB bought at issue price and held to maturity, you get the same ₹8 lakh in capital, tax-free. Plus you received 2.5% interest every year on your original ₹5 lakh investment, which is ₹12,500 per year. Over 8 years that is ₹1 lakh in interest income (taxable at slab, but you still receive it). Your total gain is materially higher.

The SGB advantage is real and significant. The problem is just availability. New tranches are not coming, and secondary market prices already price in some of this tax advantage, meaning you may not always find SGBs at a discount to NAV.

When secondary market SGBs make sense

If you find an SGB series on NSE or BSE trading close to the gold NAV price and it still has 4–5 years to maturity, it can still be worth buying for the tax-free exit. Run the numbers: is the discount or premium relative to current gold price justified given the remaining years of 2.5% interest and tax-free exit?

Some investors actively hunt these secondary market SGBs. It requires more effort than just buying a Gold ETF, but the math can work out. The key risks are liquidity (you may not find a buyer easily if you want to exit before maturity) and the fact that premature redemption before 5 years means you lose the tax-free benefit anyway.

Gold ETF, the practical default now

For most people adding gold to their portfolio today, a Gold ETF from a major AMC (Nippon, HDFC, SBI, Kotak, they all track the same thing) is the easiest and most sensible route. You buy it through your Demat account like any other stock. The expense ratio is roughly 0.4–0.6% per year, which means your returns slightly trail actual gold price but stay very close.

There is no lock-in. You can sell tomorrow if you need the money. The tax treatment is the same as physical gold, LTCG at 20% with indexation after 24 months of holding. Not as clean as SGB at maturity, but fair.

Gold ETFs also allow SIP-style investing. You can put ₹2,000 a month and build a position gradually. With physical gold, the minimum transaction size is impractical for that kind of systematic investing.

Physical gold, useful but not investable

Physical gold is a perfectly reasonable thing to own if you wear it, gift it, or keep it as an emergency asset that works without any digital infrastructure. But as an investment in the financial sense, it is inefficient. Making charges on jewellery run from 10% to 25%. Even for coins and bars, you pay a premium over the spot price on purchase and accept a discount on sale.

Storage costs money, a bank locker runs ₹2,000–5,000 a year. Insurance is extra. None of this applies to SGBs or Gold ETFs.

The argument for physical gold is entirely about trust in non-digital assets and physical possession. That is a legitimate philosophical preference. As a pure return-on-investment calculation, physical gold loses to both SGBs and Gold ETFs.

How much gold should you even hold?

Gold is a portfolio diversifier, not a wealth-builder. It tends to do well when equity markets are stressed, when inflation runs hot, or when there is geopolitical anxiety. Over very long horizons, gold has roughly kept pace with inflation in real terms, it has not produced real returns the way equity does.

Most allocation frameworks suggest 5–15% of your portfolio in gold. If you are already building wealth through long-term compounding, gold plays a defensive role, it reduces portfolio volatility and gives you something that holds value when your equity holdings are down.

The goal is not to maximise returns from gold. The goal is to hold the right amount in the most efficient form possible.

Frequently asked questions

Are new SGBs still available? No. The RBI suspended new SGB issuances in 2024. You can still buy existing SGBs on the secondary market on BSE or NSE, but no new tranches are being issued at the moment.

Is SGB better than Gold ETF? When held to maturity (8 years), SGBs are mathematically superior because of the 2.5% interest and zero capital gains tax at maturity. Since new issuances are suspended, Gold ETF is now the practical default, but secondary market SGBs can still make sense if you find them at the right price.

What are the taxes on Gold ETF? LTCG at 20% with indexation if held for more than 24 months. If you sell within 24 months, the gain is taxed at your income tax slab rate.

Is physical gold a good investment? As a financial investment, no, making charges, storage costs, and the buy-sell spread make it inefficient. It has value as a tangible asset or as jewellery, but not as a return-generating financial product.

Can I do SIP in gold? Yes, through Gold ETFs via your Demat account or through Gold Fund of Funds via a regular mutual fund SIP route (if you don’t have a Demat account). Gold ETF direct is slightly cheaper due to lower expense ratio.

If you are adding gold to your portfolio today, use a Gold ETF from a major AMC for its simplicity and liquidity, and separately check secondary market SGB prices periodically; if you find a series trading near NAV with 4+ years to maturity, the tax-free exit makes them worth the extra effort.

This post is for educational purposes only. It is not financial advice. Mohit Mehra is not a SEBI registered investment advisor. Please consult a qualified financial advisor before making investment decisions.