Experts suggest that gold prices are set to go up as financial markets across the globe are showing signs of weakness. In such a situation, investment in gold through SGBs and ETFs may be worth considering.Buying gold during the festive season is popular in India. The precious yellow metal has been considered a hedge against inflation. It provide stability along with diversification to your investment portfolio. It also conserves and adds growth during uncertain times.
Over the last decade, India has witnessed the emergence of two gold investment instruments in paper form with physical gold as the underlying asset — Gold Exchange Traded Fund (ETF) and Sovereign Gold Bond (SGB). Both track gold prices and help investors buy gold virtually. The ease of transaction, tax efficiency, low costs, safety, convenience and various other benefits make investing in the digital form of gold an attractive proposition.
Both gold ETFs and SGBs have unique features which make them suitable for different sets of investors. Which one should an investor choose largely depends on the needs and the investment horizon. Let’s have a quick close look at both these investment avenues before you opt for one.
Sovereign Gold Bonds (SGBs)
Introduced in 2015, SGBs are a simple and convenient way to invest in gold at a low cost. Backed by the government, the Reserve Bank of India (RBI) issues these bonds in various tranches each financial year. One can either buy these bonds via trading accounts, agents, selected banks, post offices, or stock exchanges. There is an issue price of the bond equivalent to 1 gram of physical gold. For instance, the price of the ongoing tranche has been fixed at Rs 4,765 per unit. It was open for subscription from October 25 to October 29. It is important to note here that the RBI issues SGBs multiple times in a year and the price is fixed for each issuance.
The minimum purchase has to be one unit (one gram) and the maximum purchase can go up to 4 kg for an individual. An online application instantly gets you a discount of Rs 50 per unit. Investing in gold bonds is free from making charges which one ends up paying for physical gold. Further, these bonds are issued by the RBI and stored in your demat account, so there is no risk of theft. One can even buy gold bonds with a permissible cash limit of up to Rs 20,000.
However, SGBs have a tenure of eight years with a lock-in of five years. After five years an investor can sell his bonds at the prevailing prices but he is liable to pay taxes on long term capital gains (LTCG) at 20.8%. If SGBs are held till maturity, gains are exempted from LTCG making it a suitable choice for investors with a long-term investment horizon.
An attractive feature of SGBs is they earn a fixed interest rate of 2.5% annually on your investment which is paid half-yearly. The last disbursal of interest takes place along with the maturity of the bond. The interest income is clubbed with the annual income of the investors and taxed according to the tax slab investor falls in.
Gold ETFs
Gold ETFs are yet another cost-efficient and modern way to invest in gold in a non-physical format. Listed on exchanges, gold ETFs track gold prices and you can invest in them through your trading or mutual fund account. Having said that, whenever you buy one unit of gold ETFs, your custodian (the fund house selling the ETF) buys the same amount of physical gold. For example, if one gram equals one ETF unit, the fund house buys one gram as well.
The cost of investment in gold ETFs is much lower as it involves nominal brokerage. Further, as these instruments are held in electronic form, one need not worry about theft threats. However, an investor in gold ETFs does not earn any predetermined interest. The only gains are capital gains linked to the appreciation of gold prices, as and when it happens.
The liquidity in gold ETFs is relatively higher than other gold instruments as they are traded like shares on stock exchanges. Since there is no lock-in period, one can enter or exit gold ETFs whenever the need arises. Investors who have a short to mid-term investment horizon may consider gold ETFs.
Gold ETFs are unique in terms of accessibility to investors. An investor does not necessarily need to buy one unit of gold ETF. You can do the low-ticket size purchases and even do a systematic investment to average out with as low as Rs. 1000 every month and collect several units during the investment horizon. In gold ETFs, you can conveniently accumulate units with lower denomination purchases.
In terms of tax treatment, if sold within 36 months, gains are liable to be part of the income and taxed according to the tax slab. If one sells gold ETFs after 36 months, the gains qualify for 20% long term capital gains (LTCG) with indexation benefits.
Finally
The prevailing Covid-induced global economic uncertainty is likely to stay for another few years. Both gold bond and gold ETFs are a great way to invest in gold digitally. The gold prices are nearly 10% on the downside compared to the recent all-time highs.
Experts suggest that gold prices are set to go up as financial markets across the globe are showing signs of weakness. In such a situation, investment in gold through SGBs and ETFs may be worth considering. They not only provide good returns but also help in diversifying your investment portfolio. Since both these instruments are low cost, tax-efficient and low-risk avenues, investors should invest in them after taking into consideration their investment duration and need for money going forward. It is always advisable to not go overboard with your gold investment and try to restrict your exposure to 5-10% of your investment portfolio’s value. This is because at times the gold prices become static for long periods and don’t give your desired results.
(The writer is CEO, BankBazaar.com)
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