Every year on the occasion of Akshaya Tritiya, several people look forward to buying gold as it is considered auspicious to own gold on this day. Like in the past, NSE is conducting an extended live trading session on Tuesday, May 07, on the occasion of Akshaya Tritiya 2019, for trading in Gold Exchange Traded Fund (Gold ETFs) and Sovereign Gold Bonds only.
Price of gold in India has moved by about 0 per cent and 1 per cent over the last 1 year and 5 years, respectively. On the 5th May 2014, the price was Rs 29.007. Currently, the price of 10-gm gold is about Rs 31,500.
As a gold buyer, there are different options available in the market – Sovereign Gold Bond, Gold ETFs, Digital Gold or the physical gold itself in the form of jewellery, gold coins or even bars. Let us see some important watch-outs before investing in any one of them.
Sovereign Gold Bond (SGB)
Sovereign Gold Bonds (SGBs) are issued by the government wherein one invest to buy gold in a paper form similar to an investment in bonds. During the initial issue, the buy price for 1 gram of gold is fixed by the government while the redemption happens at the prevailing price on maturity. They are later on listed on stock exchanges for buy and sell anytime, however, the liquidity may be a matter of concern.
As against physical gold, the cost of owning gold is less in SGB and also the worries of keeping the gold is safe is non-existent. One’s investment in SGB is subject to volatility in gold prices but investors will get a fixed interest rate ( taxable) of 2.5 per cent per annum payable half-yearly if the bonds are held till maturity.
The bonds have a tenure of 8 years, however, redemption is allowed in 5th, 6th and 7th year on the interest payment date. SGB enjoys exemption on long term capital gain tax if arising on maturity, while for bonds purchased from the secondary market, indexation benefit exists.
Each time you invest in a new issue of SGB, the holding period will be 5 to 8 years. One can even check the prices of previous issues of SGB as they could be trading at a discount and will have lesser duration left.
Gold Exchange Traded Fund (ETF)
Gold ETFs is also a paper-gold investment with gold as the underlying asset and is traded on stock exchanges all during the trading hours. The price at which it trades is closest to the price of gold. Some of the Gold ETFs traded on NSE are Axis Gold ETF, ICICI Prudential Gold Exchange Traded Fund or Reliance ETF Gold BeES.
There are three cost-heads in Gold ETFS Expense ratio which is usually around 1 per cent, the broker cost and the tracking error which arises because of ETF’s cash holding for a brief period of time. However, The impact of these charges is not significant on the total return of Gold ETFs.
The gains made on Gold ETFs are similar to taxation of debt funds as gains within 36 months are added to one’s income and taxed as per one’s tax slab while indexation benefit is available only after holding the units for 36 months and subsequently taxed at 20 per cent. Further, there are gold mutual funds which essentially are Fund of Funds as they, in turn, invest in Gold ETFs or in the shares of international gold mining companies.
Owning gold and to keep in one’s possession is possible only if one buys jewellery, coins or gold bars. However, not just safety but also the cost of owning gold in physical form is considerably high compared to paper-gold. Buying gold coins to make jewellery from them in future also carries a cost. For jewellery, the making charges are almost 10 per cent of the gold cost and may go even up to 20 per cent for special designs. If the purpose to own gold is in the near term, then maybe buying jewellery suits.
Buying gold online through apps or websites is also possible now. Gold coins, bars and jewellery are available online as ‘Digital Gold’, Several mobile wallet platforms such as Paytm or PhonePe allows buying gold in physical form to be stored with them or delivered to buyers. In addition, Stock Holding Corporation of India offers ‘GoldRush’ on its website, while Motilal Oswal offers ‘Me-Gold’. The advantage they provide is that one can own gold with a very low initial investment in digital gold.
While SGB has tax advantages, investment in Gold ETF’s comes with more flexibility. In gold investments knowing the costs involved both at the time of buying and selling is a good pointer to zero-in on the right product. If possessing gold is the objective and investment is not the purpose then nothing like wearing the yellow metal and flaunt it.