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The Ultimate Guide to Which Type of Gold Gives the Best Returns

Posted on 16 Aug 2023
Author: Sayan Sircar

Tags: Gold ; Tax

9 mins read
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This article helps you choose the right type of gold for your long-term investments since all options do not give the best results.

The Ultimate Guide to Which Type of Gold Gives the Best Returns

📚 Topics covered:

Three options of investing in gold
Cash flows of the three options for XIRR calculation
Comparison of the three options
What are the returns from the three options for different returns of gold?
Why does this result come and how to interpret it?

This article is a part of our detailed article series on the concept of Sovereign Gold Bond (SGB). Ensure you have read the other parts here:

SGB return vs issue price: what returns do you expect to get from SGB?

This article compares the currently active SGBs vs the latest SGB issue price to see what returns are implied for investors who are already invested.

Sovereign Gold Bond (SGB): Which Series is Best for You?

This article explains which Sovereign Gold Bond (SGB) series should be bought from the stock market if you are planning to invest in SGB.

How to buy SGB from the stock market?

This article shows you how to buy Sovereign Gold Bonds (SGB) from the stock market using your demat account.

Sovereign Gold Bond (SGB): complete issue price history in India

This article provides a complete history of SGB issue price history since 2015 to help investors track the how the issue price has moved over time.

Frequently asked questions on Sovereign Gold Bonds (SGB): the complete guide

This article compiles an exhaustive list of FAQs for Sovereign Gold Bonds (SGB).

Three options of investing in gold

In this article, we compare the following three options of investing in gold:

physical gold in the form of coins / bars
gold mutual fund or ETF: How to choose a gold mutual fund?
Sovereign Gold Bond (SGB): Frequently asked questions on Sovereign Gold Bonds (SGB): the complete guide

We explicitly exclude the option of investing in Digital Gold since it is not a SEBI regulated product. The returns and taxation from this type of gold will be very similar to that of physical gold. Returns from jewellery will be lower than that of physical gold due to higher making charges.

We take the following prices for these options as on publishing date:

999 purity gold from IBJA website

Price Of Pure Gold

Source: https://ibja.co/

Physical gold bar from MMTC-PAMP website

Price Of Physical Gold

Source: https://www.mmtcpamp.com/

SGB price is the average of IBJA last week prices. We assume that:

10 grams equivalent of gold are purchased in each case
there is ₹50 discount in the SGB purchase per gram of gold
Maturity is calculated at 10% return on physical gold price for 8 years
Gold MF/ETF has 0.61% expense ratio (average TER of Gold MF, includes TER of underlying ETF, offerings from 15 AMCs as per July 2023 portfolio filings)
Making charge of physical gold is backed out of the Physical gold bar price and the post GST pure gold price
Tax slab of the investor is 30% (4% cess will be there and will further reduce the XIRR of physical and MF/ETF options)
SGB does not have nay tax on the maturity value
CII value is assumed to be 4.44% which is the average of the last 5 year’s CII growth. You can get the latest CII values here: What is the latest Cost Inflation Index (CII) value?
Profit is calculated at market value post tax
Interest of SGB is reinvested into SGB issuance of future tranches. If we assume that the interest is not reinvested, the SGB return will be exactly equal to the gold price return

Cash flows of the three options for XIRR calculation

For each of the three options, we show the yearly cash flows. Since these are cash flows, money going out (original investment, locker rent etc.) are negative while SGB interest and final maturity amount are with positive sign.

Year	Physical	MF	SGB
0	-64,540	-58,898	-58,401
1	-1,200	0	1,031
2	-1,200	0	1,031
3	-1,200	0	1,031
4	-1,200	0	1,031
5	-1,200	0	1,031
6	-1,200	0	1,031
7	-1,200	0	1,031
8	112,198	102,180	126,219

Note: For SGB, there is yearly interest income of 2.5% of the invested amount which is taxable at slab. Here

₹1,031 = ₹58,401 * 2.5% * (1-30%)

Also, ₹1,200 is the locker rent for the bank locker used to store the gold. Of course, this charge will be zero if you already have a locker.

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Comparison of the three options

Based on the cash flow calculations in the previous table we show how the three options compare.

Heading	Physical	MF	SGB
Investment	58,898	58,898	58,401
GST @ 3%	1,767	0	0
Making	3,875	0	0
Total Cost	64,540	58,898	58,401
At maturity	126,253	120,730	125,188
Profit	61,713	61,832	66,787
XIRR	5.83%	7.13%	11.30%

What are the returns from the three options for different returns of gold?

In the previous example, we had assumed 10% return on gold over the 8-year investment period. We now use the same assumptions and show the returns of the three options for gold price returns ranging from -5% to +10%:

Gold return	Physical	MF	SGB
-5%	-4.6%	-3.7%	-2.9%
-4%	-4.0%	-3.1%	-2.0%
-3%	-3.4%	-2.4%	-1.0%
-2%	-2.8%	-1.8%	-0.1%
-1%	-2.2%	-1.1%	0.8%
0%	-1.5%	-0.4%	1.8%
1%	-0.8%	0.3%	2.7%
2%	-0.1%	1.0%	3.7%
3%	0.6%	1.7%	4.6%
4%	1.3%	2.5%	5.5%
5%	2.0%	3.2%	6.5%
6%	2.7%	4.0%	7.5%
7%	3.5%	4.7%	8.4%
8%	4.3%	5.5%	9.4%
9%	5.0%	6.3%	10.3%
10%	5.8%	7.1%	11.3%

We see that irrespective of the gold price return, SGB gives the highest return of the three options of investing in gold over a 8-year investment horizon.

Why does this result come and how to interpret it?

SGB is the only gold investment option where:

there is no tax on the maturity amount. All other investments in gold are taxable on maturity
SGB return is guaranteed by the government unlike the rest which do not have sovereign guarantee
there is interest income at 2.5% interest, albeit taxable. No other investments in gold gives interest

These two features of SGB makes it the best option to invest in gold purely from a return perspective. Whether it is suitable for inclusion in a portfolio for long-term goals will require understanding of the exact use case.

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