Gold has truly been a star performer over the last 2-3 years thanks to falling yields globally followed by the Coronavirus pandemic. Remember how our so-called advisors had written off gold as an investment due to its non-performance, but here we are with Gold yielding nearly +80% (in rupee terms) in the last two odd years.
We have always advocated allocating a certain amount of your portfolio into gold. Read here for asset allocation. It also acts as a hedge against inflation and currency risk. Therefore staying invested in Gold is imperative for investors.
Here are some of the best alternatives to invest in Gold:
One can now buy gold in the form of Gold Coin, Bar, or jewellery on digital payment platform like Paytm. One can either store the gold (post purchasing) in their digital locker for free or pay making charges and receive actual gold coins, bar, or jewellery. There are other platforms like ‘Gold Rush’ from Stock Holding Corporation of India. One can start from as little as Rs. 100 in Gold Rush whereas in Paytm one can start with as low as Rs. 1. However, to receive physical delivery, one must have accumulated 1 gram of gold at least.
Gold Rush has only physical delivery option whereas with Paytm one can sell the gold to Paytm itself if a customer does not wants physical delivery. There are several costs associated when a person buys or sells gold on Paytm apart from making charges that include taxes (around 3% while purchasing and selling), technology cost, hedging cost, and bank charges. In both these platforms, one can keep the gold for a maximum period of five years.
This is one of the most cost-effective ways of owning paper gold as these are traded on the exchanges that is BSE and NSE. One must have a Demat account to purchase the Gold ETF. The benchmark for this ETF is closest to the physical gold price. There are three main costs one is the expense ratio of the fund which is around 1%. Second is the transaction cost (again minuscule). The third is the tracking error which is the difference between the actual gold price and the ETF. One can buy in lumpsum or even go through with a SIP mode. In terms of taxation, if it’s sold before 36 months, any income would be added to investors’ income and taxed according to the tax rate bracket. If held for more than 36 months it attracts a tax of 20.8% including cess with indexation benefits.
Sovereign Gold Bond (SGB)
Sovereign Gold Bonds are issued by the government on regular intervals (2-3 months) and are open to subscription when the window is open. One can even buy the already listed bonds in the secondary market. SGBs have a maturity of 8 years and lock in would be for five years. In terms of return, SGBs are market-linked and therefore will depend on the prevailing market price of gold at the time of maturity. One can sell it in the secondary market as well; however, there is price risk and liquidity risk. Further, the SGB yields 2.5% which is paid semi-annually to the investor directly into their bank account. The minimum investment required is 1 gram and multiples of 1 gram thereafter. The maximum limit is 4 kg for an individual in a financial year. Read more on this here.
Which one to choose for investment purpose?
For investment purpose, choosing between Gold ETF and SGB would be prudent as they are more cost-effective. Between the two, it largely depends upon your horizon and investment requirements. In our view, both gold ETFs and Sovereign Gold Bonds are good investment options. The advantages for Gold ETFs are no lock-in period which means it can be bought and sold anytime, SIP mode available, and are liquid enough to trade. The disadvantages are that it attracts income tax plus the cost even though it is minuscule is still higher compared to SGBs.
The advantages of SGB are quite a few including interest payment of 2.5%, tax-free, cost-efficient (compared to ETFs), sovereign backed which means it is most likely to be honoured. The disadvantages are that the government comes with a subscription (new bond issuance) usually in 2-3 months; therefore an investor has to wait for the subscription to open. However, an investor can buy it from the secondary market, but liquidity is an issue. This is because the volumes in the secondary market are quite less. The third one is the lock-in period of 5 years or could face liquidity issues if you want to sell it in the secondary market.
Both these options are good investment choice. However, one must take into account their horizon to invest and liquidity needs and then make a decision.