As an investment option, gold has enjoyed prized status among Indian investors. Besides the traditional and emotional bonding, the yellow metal’s track record in safeguarding wealth during financial uncertainties and inflation has been striking. The global economy is currently witnessing one of its biggest challenges ever with volatile stock markets as a result of the Covid-19 pandemic. But gold is the only asset class gaining handsomely in the ongoing turmoil. It has risen nearly 60% since the start of 2018, touching Rs.50,000 per 10 grams recently, and experts predict that continuing uncertainties over Covid-19 will keep driving the demand for gold, thus pushing up its price further.
If you are planning to ride this wave and want to make gains by investing in gold, here are a few smart instruments you can consider.
Buying physical gold is one of the most preferred and convenient ways to invest in gold. You can buy physical gold in the form of jewellery, gold coins, biscuits etc. It is probably the easiest way to invest as you do not require any broker or assistance to buy gold this way, and there is no investment limit you need to adhere to. Besides the ease of investing, gold could also provide quick liquidity during your urgent financial needs. The flipside of investing in gold this way is the costs of safe storage, concerns over purity, and making charges along with taxes which eat into your margins.
Gold exchange-traded funds or Gold ETFs enable you to invest in gold digitally and conveniently. This instrument is highly liquid and can be easily bought or sold through a stock exchange just as you would trade in stocks. Through an ETF, you possess gold in a dematerialised form. Investing in gold is hassle-free and cheaper than physical gold as there are no buying and selling charges involved. You can 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. Since the gold is dematerialised, there are no concerns over purity and storage. Your gains from gold ETFs are taxed at par with returns from physical gold, i.e., as per your slab rate for short term capital gains or at 20.6% with indexation for long term capital gains. You will bear additional charges such as trade brokerage, demat charges, etc.
Sovereign Gold Bonds
Sovereign Gold Bond (SGBs) is a government-backed scheme considered safe and easier to invest in than physical gold. While investing, you do not have to worry about the purity and storage of the metal. The Reserve Bank of India handles the subscription process of SGBs on behalf of the government. Subscriptions are opened multiple times every year for fixed periods with a price fixed for each period. You can buy a minimum of one gram and the maximum limit of four kilos if you’re an individual or HUF. Trusts and similar entities can buy around 20 kilos per fiscal. You can subscribe to SGBs through Stock Holding Corporation of India Limited (SHCIL), designated post offices, NSE and BSE, either through your investment agent or directly. You earn a fixed interest rate of 2.50% p.a., which is paid twice in a year on the nominal value. Unlike physical gold and gold ETF, this scheme doesn’t provide easy liquidity as the bonds have an eight-year tenure. However, the lock-in period is only for 5 years and you can use exit option from the 5th, 6th and 7th years on the interest payment dues. Investing in SGBs will save you from the capital gains tax as the redemption of the bonds has been tax-exempted for individuals. Indexation benefits will be provided to long term capital gains arising to any person on transfer of bond. Unlike other gold investment options, the assured interest income and tax-free returns on maturity make this an attractive proposition, and your capital gains from the bond will be linked to actual gold prices.
How Much Should You Invest?
Gold prices always spike whenever there is economic uncertainty or market volatility. While long-term returns on gold have remained moderate to low, your investment in gold should be like any other investment instrument. Do not over-invest just because the prices are going up. Decide your investment exposure in gold based on your income, risk profile, financial goals and return. The best investment strategy to get effective results is diversification. It will not only keep you safe from associated risks but will also provide returns at different intervals of time amid market volatility. Ideally, you might want to keep your overall exposure to gold to 5-10% of your overall investment portfolio.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.