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Sovereign Gold Bonds Vs Mutual Funds

3 Mins 22 Dec 2022 0 COMMENT


Most investors are familiar with the investment vehicles like mutual funds and sovereign gold bonds as well as the SGB and mutual funds difference at an intuitive level. For example, investing in gold can done either through SGBs or through gold ETFs, which is a type of listed closed-ended fund floated by an MF. In this SGB vs mutual funds debate, we shall see some of the key highlights of what these asset classes constitute. What are the parameters to be considered in this mutual fund vs sovereign gold bond comparison?

A basic similarity is that both are market linked products. Mutual funds also have market risk or price risk and the SGB also has price risk linked to the movements in the price of gold. That is the basic thing you need to understand in this sovereign gold bond vs mutual fund debate. At the end of the day, both are investment vehicles to indirectly participate in a market driven asset class. Of course, the one difference between sovereign gold bonds and mutual funds is that the former is passive while the latter can be active or passive.

Explain SGB and Mutual Funds

Let us first look at the two concepts of SGB and mutual funds as an investment vehicle.

  • Mutual funds are collective investment schemes managed by an asset management company (AMC) and regulated by SEBI. Mutual Funds pool small units of money and invest a large corpus in pre-decided assets. Mutual funds invest in equity, debt, liquid assets and precious metals based on investment objective.
  • Sovereign gold bonds (SGB) are bonds issued by the Indian government backed by equivalent units of gold. These bonds also pay interest at the rate of 2.5% annually on a half yearly basis. The entire SGB amount is backed by gold and the value of the SGB just moves in tandem with the price of 24 Carat gold. SGBs have a lock-in period of 8 years with the first liquidity window after 5 years. SGBs are listed on the stock exchange.

Difference between sovereign gold bonds and mutual funds

While SGBs are issued by the government, the mutual funds are originated by the asset management companies (AMCs). MFs are available on tap for sale and repurchase at NAV linked prices. SGBs are sold in tranches with 8 year tenure. RBI provides liquidity window at the end of fifth, sixth and seventh years.

As an investing option

Mutual funds are good for financial planning i.e. equity funds for long term wealth creation and debt funds for stability. SGBs are a hedge for the portfolio as a strong asset class in tumultuous times.

Pros and cons of SGB and mutual funds

Broadly, here are the pros and cons of investing in sovereign gold bonds (SGB) versus mutual funds.

a) Sovereign gold bonds are debt to the government backed by gold. The value of the SGB is linked to the market value of gold. On the other hand, mutual funds are invested in a portfolio of underlying assets and derive the value from the underlying assets, adjusted for the total expense ratio (TER) of the fund.

b) Sovereign gold bonds are issued in tranches by the government through the RBI and marketed by banks, post offices, stock exchanges and SCHCIL. Open ended funds are available on tap at NAV linked prices on a daily basis. However, closed ended funds are not; but like Exchange traded funds (ETFs), they are listed on stock exchanges.

c)  Sovereign gold bonds assure 2.5% annual interest that is payable semi-annually. This is also guaranteed by the government. The returns on the price are market driven as it depends on the price of gold. Mutual funds do not have any assured return component.

d)  In terms of taxation, Sovereign Gold Bonds (SGBs) interest will be taxed like other income at the peak rate of tax applicable to the investor. However, if held for the full tenure of 8 years, the SGB is free of capital gains tax. Any holding of less than 8 years attracts capital gains tax. It is STCG for holding up to 3 years and LTCG between 3 to 8 years. In the case of mutual funds, the capital gains taxation depend on whether it is an equity fund or non-equity fund. LTCG and STCG on equity funds is charged at a concessional rate and the holding period is also 1 year for LTCG, as against 3 years for non-equity funds. Dividends on equity and non-equity funds are fully taxable in the hands of the investor.


Sovereign gold bonds are an elegant way of investing in gold with assured interest. However, gold must ideally be 10% to 15% of your overall investment portfolio. Mutual funds drive long term financial planning more effectively.