Q: Hi, Adhil. Due to the recent spike in gold prices, I’m planning to start investing in the yellow metal. I’m particularly interested in Gold Exchange-Traded Funds and Sovereign Gold Bonds. Which one is the better investment avenue according to you? Kindly advise – Virendra.
Ans: Hi there. Yes, gold prices are currently reaching record highs and smart investors should not let go off this opportunity. And I appreciate your preference for digital gold investments as they are free of storage and purity concerns. Besides, physical gold could also involve making charges and additional tax which might eat into the investment returns. And as far as God ETFs and SGBs are concerned, both are investment tools that could provide good returns and some additional solidity to your investment portfolio.
Now, the Reserve Bank of India-issued SGBs come with a 2.5% p.a. interest income credited to the investor’s account on a semi-annual basis in addition to the actual price of gold on the day of sale. Individual subscribers and HUFs can invest in SGBs from one gram to four kilograms of gold and there is no capital gains tax on maturity of these bonds for individual subscribers. The central bank issues SGBs multiple times in a year and fixes a price for each issuance. Subscribers can also purchase and sell SGBs on the secondary markets. The lock-in period is for 5 years and you can use exit option from the fifth, sixth and seventh years on the interest payment dues.
If you’re looking for a slightly more liquid investment option, you can consider gold ETFs. These allow you to invest in dematerialized gold which can be bought and sold on the stock exchange just like shares. You can also invest to any limit upwards of the unit price of any ETF which is typically linked to the price of one gram of 24k gold. Your gains are taxed as per your income tax slab rate for the short-term while long-term gains (of holding period of over 3 years) are taxed at 20.6% with indexation benefits. However, there is no fixed interest income over the selling price of gold like SGBs.
As such, you must make a choice after carefully evaluating your returns expectations, risk appetite and liquidity requirements. That being said, you’ll be well-advised not get overboard and limit your gold investments to 5-10% of your investment portfolio’s value, simply because the prices of the yellow metal tend to flat-line over long periods of time despite the recent upward trend, and maybe insufficient to meet your financial goals on time on its own.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.