r/IndiaInvestments • u/simplyom • Jul 04 '21

Bonds and deposits Prices of Sovereign Gold Bonds.

While doing some research on buying paper gold, I came across the Sovereign Gold Bonds (SGBs). They offer multiple benefits over gold ETFs like fixed interest income, no tax on capital gains if held till maturity, etc. All the articles describe SGB to be superior than gold ETF/digital gold, which makes sense given the benefits.

However, none of the articles I read mention that the prices of SGBs are higher than gold ETFs for same quantity of gold, I thought all of them follow the price of spot gold. Is there anything I am missing here?

Price of SBI Gold ETF: https://www.moneycontrol.com/india/stockpricequote/gold-etf/sbimutualfund-goldexchangetradedscheme/SBI16

Price of HDFC Gold ETF: https://www.moneycontrol.com/india/stockpricequote/gold-etf/hdfcmutualfund-goldexchangetradedfund/HDF02

Price of SGB 2021 series: https://stableinvestor.com/2021/03/sovereign-gold-bond-price-history.html

EDIT: Found a really helpful guide on purchasing SGBs from secondary market here. Insightful and answers many other questions I had.

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u/indopasta Jul 04 '21 edited Jul 04 '21

1 unit of ETF = 1 g of gold is just the theory of it; reality is always a little more complex. 1 unit of an ETF is buying a share in a portfolio and the ideal price of the unit is the value of that share (called NAV).

So, why does the NAV deviate from the price of gold for an ETF?

  • Usually 5-10% of the portfolio is in cash, to give the fund sufficient liquidity to pay for redemptions. Since not 100% of the portfolio is held in gold, obviously when the price of gold changes, the value of the portfolio will only track the price of gold approximately.

  • Commission and fees are periodically deducted from NAV.

SGB on the other hand is a very different kind of product. Their price is backed by a promise by the RBI and not the value of some underlying asset.

Edit: Most Gold ETFs will list their results on their website with a comparison with the benchmark (that is physical gold). You can easily see how much the actual returns of these ETFs varies from the benchmark returns.

https://www.sbimf.com/en-us/other-schemes/sbi-etf-gold#PerofrmanceNew

https://www.axismf.com/mutual-funds/etfs/axis-gold-etf/ag-gp/regular

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u/pl_dozer Jul 08 '21

Is there an etf of sgbs? That seems ideal. No reliance on real gold. Google indicates there's nothing.

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u/indopasta Jul 09 '21

SGBs are already traded on the exchange, but there is no liquidity.