Amid the absence of new Sovereign Gold Bonds (SGBs) from the government, investors are increasingly gravitating toward gold Exchange Traded Funds (ETFs), driven by favourable tax reforms, a reduction in customs duties, and broader market uncertainties. Over the last four months, gold ETFs have recorded substantial inflows, with investments reaching Rs.4,500 crore, close to the total Rs.4,728 crore recorded for the entire previous financial year ending March 2024.

One of the key drivers behind this surge is the government's recent decision to reduce the long-term capital gains tax on gold. Previously taxed at an investor’s income tax slab rate, holdings over two years now attract a lower flat rate of 12.5%, which has spurred a renewed interest in gold-backed funds. Additionally, the absence of fresh SGB issuances has left investors with fewer options, making gold ETFs a more attractive alternative.

Gold ETFs, which are traded on stock exchanges, offer liquidity and ease of transactions, allowing investors to buy and sell quickly, unlike Sovereign Gold Bonds, which have fixed maturities. This flexibility has made ETFs particularly appealing to those looking to maintain exposure to gold without committing to long-term lock-ins.

In addition to these tax benefits, the geopolitical environment remains a significant factor. The ongoing uncertainties in global markets, including political instability in regions like the Middle East and upcoming elections in Europe and the United States, have continued to support the price of gold, which is often viewed as a safe-haven asset during periods of economic turmoil. With central banks also diversifying their reserves through increased gold purchases, prices are expected to stay elevated.

For many investors, particularly those whose SGB holdings have matured, the shift to gold ETFs represents a strategic redeployment of funds. With the maturity of several SGB series, investors have received lump-sum payouts and are choosing to reinvest in ETFs to maintain their gold exposure. Distributors have reported this trend as more investors turn to these exchange-traded options.

With gold delivering a 19.44% return over the past year, compared to the Nifty's 25% gains, it continues to attract a diverse range of investors looking for portfolio diversification and stability. Many financial experts believe this trend is likely to persist throughout the year, as the combined effect of favourable taxation, customs duty reductions, and ongoing geopolitical risks further solidifies gold ETFs as a popular investment vehicle.

As the market awaits the next move on Sovereign Gold Bonds from the government, the current momentum behind gold ETFs is expected to grow, providing an attractive alternative for both retail and institutional investors seeking to capitalize on the long-term stability of gold.