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ALL THAT GLITTERS IS GOLD
Updated: Mar 4, 2021
I keep getting questions on which medium is the best for Gold based investments. Investment in Gold could be done through Physical Gold (Not Recommended), exchange-traded funds (ETFs), and Sovereign Gold Bonds (SGBs).
I will give you guidelines on ETF’s and Gold Bonds. You should choose between these options wisely as each has specific features and drawbacks associated with it. To help you select, here is a comparative analysis of the three gold buying options
1. ETF’s: These are exchange-traded funds which can be bought and sold on exchanges. Since the benchmark of gold ETF is physical gold price, you can buy it close to the actual price of gold. To buy gold ETFs you need to have a trading account with any shareholder and a DMAT account. Unlike physical gold, which come with high initial buying and selling charges, gold ETF costs much lower.
Features of gold ETFs
A. Risk of theft: Risk of theft when investing in Gold ETFs is very little as compared to physical gold.
B. Investment: Minimum investment can be made for as low as 1 gram of gold. You can also invest via the SIP route rather than making investments in a lump sum and trying to time the market.
C. Taxation benefits: If you hold gold ETFs for more than 3 years, the capital gain is subjected to 20 percent tax post indexation.
D. Purity concern: Purity is not a problem as they are held in electronic (Dmat) form. Also, because of its direct gold pricing, there is complete transparency in the holdings of an ETF.
Disadvantages -charges are applicable: The expense ratio (fund management charges) of around 1 percent.
2. Sovereign Gold Bonds (SGB) These are Government securities issued in multiples of one gram of gold. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and are traded on an exchange. These can also be used as collateral for taking loans.
Features of SGB
A. Risk of theft: Risk of theft is low as compared to physical gold.
B. Interest earned: The government has fixed 2.5 percent assured interest per annum on the issue price. The interest is paid half-yearly and the last instalment is payable on maturity along with the principal.
C. Taxation benefits: TDS (tax deducted at source) is not applicable on interest. According to an RBI notification, the capital gains tax arising on redemption has been exempted for an individual. The indexation benefits will be provided in case of LTCG arising to any person on transfer of bond.
D. Purity concern: Gold bond prices are linked to the price of gold of 999 purity (24 carats) published by India Bullion & Jewelers Association (IBJA).
Disadvantages Liquidity can be a bit of concern as the bond has a tenor of 8 years. Also, the lock-in period is for five years. You can only withdraw money from the 5th year on the date on which the interest is payable.
Choose the medium or a mix which is most suited to you.
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