Gold ETF and Gold Bonds – Never miss the opportunity. Gold has fascinated man from time immemorial. And gold is the most sought after commodity, especially for Indians. Though Indians buy gold mainly for ornamental purposes, inside their minds they consider it as a secured investment.
The price of gold has always shown a steady increase in history. And naturally, this has increased the demand for gold as a safe investment platform. Gold has been able to produce a price appreciation of around 12-13% on an average, irrespective of the time frame.
But the million-dollar question is that, do the people who buy gold as an investment are able to reap the benefits at its best. The answer is a big “No”.
Table of Contents
Physical Gold – the hardships
Gold is a good investment. Did I say physical gold? No, Never – why? Let’s have a detailed look.
Storage of physical gold – points to remember
Many people do not know that the Govt of India has set a limit to the amount of physical gold one can keep at any point in time. The prescribed limit is as follows.
- A married woman can have up to 500g of gold.
- An unmarried woman can have up to 250g of gold.
- A man can have up to 100g of gold.
If you keep more gold than this prescribed limit it is illegal. Further, you will have to keep the proof of purchase to satisfy IT authorities, and anticipate a query any time in the future also.
Keeping Gold Safe is a tough job
Being a high priced commodity, the risk of getting stolen is very high for gold. Keeping large quantities at home can impose threat even to the life of the family members. You can store it in bank lockers safely but you will need to shell out extra money which eventually will eat into the profit you gain.
Gold as Ornaments – the untold facts
- You won’t get 100% pure gold – maximum purity is 91.6% because pure gold cannot be used for ornaments.
- Making Charges – Even though most ornaments are machine-made and the making charges are negligible, the Jewelleries will charge you any were between 8% to 36% or even more extra for ornaments. That means when you change an ornament once you loose around 1/3rd of your gold.
- Even 916 hallmarked gold ornaments fetch lesser amount when sold, on purity issues.
Gold ETF – an alternative to physical gold
Gold ETF (Exchange-Traded Fund) is a commodity-based mutual fund, that invests in only one principal asset – gold. Exchange-traded funds act more or less like individual stocks, and they trade on exchanges in the same manner. The fund itself holds gold derivative contracts that are backed by physical gold but in dematerialized and paperless form.
These exchange-traded funds are rated as some of the best defensive assets available in the market. It is considered to have the same class traits as bonds as many investors use them to insure their investments against economic fluctuations, and in extreme cases, currency debasement. The price of gold can rise by a significant margin if major currencies, like dollar, tend to fall weak.
Each unit of these traded funds represents 1 gram of 99.5% pure gold, which makes them ideal long-term investments, especially if an individual opts to invest larger sums or performs trade systematically. They are similar to other ETFs but gold ETFs generally don’t provide dividends.
Who should invest in gold ETFs?
- Investors who are willing to lock-in their funds for a longer period of time, at least 3-5 years should consider investing in Gold ETFs.
- If you wish to bank on the increasing value of gold in the future, Gold ETFs should be your choice of investment.
- If you are looking for gold investments without paying any additional costs such as making charges, etc., gold ETFs or paper gold fulfill your objective of saving on those charges.
- Larger quantities can be purchased without storage issues and little or zero risks of getting stolen.
- No entry or exit loads – Gold ETFs do not attract any entry or exit loads. Investors only have to pay 0.5% to 1% brokerage on transactions.
- Tax benefits – Other than capital gains tax, these traded funds do not attract GST, Securities Transaction Tax, or Value Added Taxes.
How to invest in gold ETFs??
To invest in Gold ETFs, just like stocks, you require a trading account that is generally opened with a broker (like Zerodha or Kotak securities) and a Demat account. You can buy and sell gold continuously on any day Just like stocks. One can either buy them in a lump sum or even at regular intervals through systematic investment plans (SIP). What’s more, you can even buy in small quantities as low as 1 gram of gold.
Taxation on gold ETFs
Just like any other investment vehicle gold ETFs are also taxed in India for their capital gains. In India Gains from the sale of gold ETFs or gold mutual funds are taxed similarly as that of the physical gold.
Short-term capital gains on units held for less than 36 months will be added to investor’s income and taxed as per the applicable slab rate. Long-term capital gains on units held for more than 36 months are taxed 20.8% (including cess) with indexation benefits.
Sovereign Gold Bonds (SGBs)
Sovereign gold bonds are RBI mandated certificates issued against grams of gold, allowing individuals to invest in gold without the strain of safekeeping their physical asset. The government of India launched the first sovereign gold bonds scheme in 2015.
Rather than owning gold in physical form and keeping it idle without earning anything on it, SGB gives an opportunity to own gold and earn interest on it. The government of India has fixed 2.5 % assured interest per annum for SGBs. The interest is paid on a half-yearly basis and the last installment is paid along with the principal.
Generally, the RBI announces issuance of the latest sovereign bonds in a press release every 2-3 months, with a one week window during which individuals can subscribe to this scheme.
The bonds have a maturity period of eight years and also provide an option to exit from the fifth year.
Advantages of Sovereign Gold Bonds
- Gold bonds can be owned at a discounted rate compared to market rates.
- No making charges or hidden costs.
- Completely safe and assured with Reserve Bank Guarantee.
- Even though gold bonds come with a lock-in period of 5 years, the certificate of deposit can be sold anytime in the market. So liquidity issues are solved to some extent.
- We get a discount of Rs 50 /gram if we buy gold bonds online.
The downside of owning Sovereign Gold Bonds
- The exit option is available only after the 5th year. (In other words, they are less liquid than gold ETFs)
- SGBs are available for purchase only on prefixed short durations. For investors looking to purchase SGBs on other occasions will have to rely on the secondary market.
Who can invest in gold bonds?
Any Indian resident can invest in Sovereign Gold Bonds. Individuals, HUFs, trusts, charitable institutions, universities, etc. also can invest. An individual can buy up to 4 kg The SGBonds in multiples of gram(s) of gold with a basic unit of 1 gram. Trusts can purchase up to 20 kg of gold as SGBs.
Gold ETFs & Sovereign Gold Bonds provide an opportunity for the populace to invest in gold with more ease and less risk.These instruments can help you diversify your investment portfolio in an effective manner.