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WealthJot.ai

Gold: Physical vs ETF vs SGB

beginner7 min read

Jewellery loses 10-25% the moment you buy it. The paper routes fix that — and one of them even paid you to hold gold.

Indians hold more gold than any other nation’s households — and most of it is held the most expensive way possible. There are really three routes to owning gold: physical (jewellery, coins, bars), *gold ETFsAn exchange-traded fund that tracks gold prices. / gold funds* (paper gold in your dematAn electronic account that holds your shares.), and *Sovereign Gold BondsA loan to a government or company that pays fixed interest. (RBI paper that tracks gold and* pays interest). All three ride the same gold price; they differ enormously in what they quietly charge — or pay — you along the way.

Price every route as gold price ± friction. Physical: you pay ~8-25% in making charges on jewellery, 3% GST, and often a purity haircut when selling — buying jewellery as an “investment” starts you 15-25% underwater, before storage and locker rent. Coins/bars are better (~2-8% premium) but still cost GST and storage. **Gold ETFAn exchange-traded fund that tracks gold prices.**: buy on the exchangeA regulated marketplace where shares are bought and sold. like a stock; friction shrinks to a ~0.5-1% annual expense ratioThe annual fee a fund charges, as a % of your money. and the bid-ask spreadThe gap between the highest buy price and lowest sell price. — no GST, no purity doubt, no locker. **SGBThe ancient store of value and crisis hedge.*: the RBI instrument flips friction negative — it pays 2.5% annual interest on top of* the gold price, and capital gainsProfit from selling an asset above its purchase price. at redemption are tax-free for individuals. The catch: the government stopped issuing new SGBThe ancient store of value and crisis hedge. tranches (the last fresh issue was in early 2024), so today you can only buy them second-hand on the exchangeA regulated marketplace where shares are bought and sold., where thin liquidityHow easily an asset can be bought or sold without moving its price. means premiums/discounts and limited quantity. So the practical ranking for a buyer today: SGBGovernment bonds that track the price of gold. off the secondary marketWhere existing securities trade between investors. if you can get a fair price and can hold to maturity; otherwise a gold ETFAn exchange-traded fund that tracks gold prices. or gold fund; physical only for gold you’ll actually wear.
ExampleThree friends “invest” ₹2 lakh in gold. Asha buys jewellery: after 18% making charges and 3% GST she owns about ₹1.62 lakh of actual metal — gold must rise ~23% for her to break even. Bina buys a gold ETFAn exchange-traded fund that tracks gold prices.: ₹2 lakh of exposure minus ~1% a year, sellable in one tap. Chitra had bought SGBs at issue: the same gold exposure plus ₹5,000/year interest, and her maturity gains are entirely tax-free. Same view on gold; three wildly different outcomes.
Common mistake“Jewellery is an investment — it’s in the family.” Jewellery is consumption with residual value: between making charges, GST and the resale purity haircut, the round-trip cost is routinely 20%+. Buy jewellery to wear and enjoy, honestly. For the investment slice of gold, use paper routes where the friction is 1% a year, not 20% upfront.
Test yourselfWhy does buying jewellery as an ’investment’ start you 15-25% underwater?
Making charges (8-25%), 3% GST, and a purity haircut on resale — all friction the gold price must overcome before you break even. Gold ETFs cut friction to ~0.5-1%/year; SGBs (secondary market only now) even pay 2.5% interest with tax-free maturity.
✓ You learnedAll gold routes ride the same price; friction decides the winner. Jewellery starts you 15-25% underwater (making charges + GST + resale haircut). Gold ETFsAn exchange-traded fund that tracks gold prices. cut friction to ~0.5-1%/yr. SGBs historically beat everything — gold price plus 2.5% interest plus tax-free maturity — but with fresh issuance discontinued they’re now a secondary-market hunt. Keep gold at 5-10% of the portfolio: it’s a diversifier, not an engine.
FAQs
Are Sovereign Gold Bonds still available?

Not as fresh issues — the government paused new SGB tranches after early 2024. Existing bonds trade on the NSE/BSE, so you can still buy them second-hand through your demat account. Check the traded price against the actual gold price (thin liquidity creates premiums and discounts), and remember the tax-free capital gain applies at *maturity* — bonds sold early on the exchange are taxed like other capital assets.

Gold ETF or gold mutual fund — which one?

A gold *fund* is usually just a wrapper that buys the gold ETF for you. If you have a demat account and can trade, the ETF is marginally cheaper; if you want SIPs and no demat, the gold fund’s small extra fee (~0.1-0.2%) buys convenience. Both beat physical by miles for investment purposes.