Sovereign Gold Bonds (SGBs) are the perfect alternative to investment in physical gold. With these bonds, you can enjoy capital appreciation and also earn interest every year.There are abundant precious metals all around the world but gold is placed in high regard for investment purposes. Investing in gold in India is very different from investing in gold in any other part of the world because people in India attach a lot of sentimental value to gold. It is viewed as a passive investment in India, which is stored as an asset for the future or bad times.
On the other hand, mutual funds have raised high on the charts of preferred investment options. Usually, it is advised to invest in mutual funds through SIP. An equity mutual fund is a way to go if you’re looking for substantial growth. Nonetheless, unlike investing in gold, investment in mutual funds requires a great deal of knowledge and planning on the investor’s part.
Choosing one over the other as the clear winner, according to experts, could be a mistake. Selecting whether to invest in mutual funds or gold depends on a variety of factors such as the investment amount at disposal, the risk appetite of the investor, the goal of investment, etc. It is natural and even wise for an investor to speculate if a particular asset is better than the other. The best way to realize what’s best for you is to carefully weigh your risks and goals and then decide. The wise approach for any investor would be to distribute his/her funds proportionally between gold and mutual funds because both investments have their pros and cons.
Returns in last 10 years
India being the largest market for gold in the world has a significant emotional and social value attached to it. It is a safe hedge against inflation, which makes it worth investing in. Gold has delivered 11.7% annualized CAGR return in the last 12 years and 9.8% in 10 years and is expected to grow much more in the future. On the other hand, since the introduction of SIP’s in India, investing through it has come a long way. The current SIP book accounts for about 1.32 lakh crore and the industry is adding around Rs 5,000 crore per month through SIPs. Witnessing the tremendous growth of the industry, experts expect the Mutual Fund industry to double in the coming two years.
Investment amount
The initial investment cost to buy even a small quantity of physical gold is evidently high. Unlike the initial investment in gold, mutual funds have a low initial investment rate. The initial investment in physical gold can go up to multiples of 10000, while the same can go up to Rs 500-1000 in mutual funds via SIP. On the other hand, investing in SGBs instead of physical gold can be much more profitable as it is denominated in grams, so the minimum investment can be 1 gram.
Charges
The making charges of physical gold can go up to 10%, which are not redeemable when you sell your gold back. Usually, the making charges of gold jewelry are charged at a flat rate per gram say Rs 199, or as a percentage of the cost of gold jewelry. On the flip side, Mutual Funds went through a lot of regulatory changes in 2020. According to Sebi, the body that regulates mutual fund charges, assets above Rs 50,000 crore will be able to charge 1.05% annually. The body also blocked the mutual funds industry from doling out upfront commissions to distributors.
Risk
Physical gold has its perks and can be a potential long-term investment. But physical gold is a tangible asset, with a ‘touch and feel’ aspect attached to it. Thus, it carries a certain amount of risk like storage problems, making charges, theft, etc. Mutual funds, on the other hand, do not guarantee fixed returns therefore, an investor should always be prepared for any eventuality like depreciation in the value of their funds. Thus, mutual funds involve the risks of price fluctuations.
Refund
Gold as well as Mutual Funds are considered almost high on liquidity. Still gold wins over the mutual funds as you can sell gold and get cash immediately. On the other hand, mutual fund redemption is a way to make a graceful exit. If an investor feels the need to exit a mutual fund scheme, they can redeem the units they hold. The redeemed amount will be credited back to their account after they’ve submitted the redemption request to the fund house.
Gold has been the asset of choice for Indians when it comes to investment. Historically, our forefathers invested in jewelry because the making charges were minuscule, and owning precious jewelry items indicated a high-status symbol. However, as the times changed, investors are now advised to invest in SGBs, Gold ETFs, etc as owning physical gold tags along with a variety of risk factors. No doubt, investments in Mutual Funds have been steadily increasing and the industry added more than 81 lakh investors accounts in alone 2020-21, taking the standard up to 9.78 crore. We expect a steady growth in folios would continue in the ongoing fiscal also.
Sovereign Gold Bonds (SGBs) are the perfect alternative to investment in physical gold. With these bonds, you can enjoy capital appreciation and also earn interest every year. These bonds, issued by the Government of India, also eliminate several risks associated with physical gold.
Benefits of Sovereign Gold Bonds: On screen Capital appreciation linked to gold prices along with additional interest of 2.50% per annum. It eliminates the risk and the cost of storage applicable to physical gold and is exempted from capital gains tax, if bonds are held till maturity. The bonds have tenure of eight years, with an option to exit from the bond from the fifth year and sixth month onwards. A holding certificate is issued as a proof of your investment in the bonds which offers convenience of investing online.
(By Hemant Sood, Managing Director, Findoc Group and an Angel Investor in Start-ups)
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