Good Old Gold in New Bottles: Where Should You Invest?

Should you invest in gold?

Chenthil Iyer, a SEBI registered financial advisor, points out that gold is a store of wealth in times of recession and hyperinflation. Plus, it is a rare metal, so its prices tend to rise over time. Hence, a healthy amount of investment should go into gold to give the overall portfolio a much-needed stability.

In the last five years, return of gold were around 11.7% per annum (per annum), and in the last 2 years (2020 and 2021), it was 19% per annum. But what needs to be noted is that in 2020, Return There were 38%, but in 2021 it was only 0%. Gold is extremely volatile and bounces up and down frequently; Over the long term, there was a point when the return was -20%, while the highest was 82%. Avinash Luthria, a SEBI-registered investment advisor, said, “Therefore, there is no way to predict how much return it might provide in the coming years.

Who should invest in Sovereign Gold Bond (SGB)?

“Undoubtedly, it suits everyone. There is a sovereign guarantee. So, even if gold prices rise sharply, the Indian government and the RBI have enough gold to ensure that payments are made,” says Iyer .

For beginners, SGBs are not actually gold investments, but debt instruments, which are linked to the price of gold. That is, the price of one unit of SBG is per gram of gold (current price). And, at maturity, its value will be the average price of gold in the Indian market (maintained by the Indian Bullion and Jewelers Association) during the week. There is no guarantee that you will get your principal back. “However, over the long term, the price of gold usually appreciates significantly,” Iyer says.

Then, if you hold it for 8 years (full term), the gains made from it are completely exempt from tax. Luthria comments, “And what works as a sweetener is that you get 2.5% interest annually on the bond.”

The main concern for SGB is that the product is extremely liquid. Firstly, you cannot buy it any time (in the primary market) but have to wait for RBI to issue bonds, which happens only once in 2-3 months. Secondly, you have to hold it for 8 years to get the full benefit of it.

Although they can be bought/sold very easily in the secondary markets, there are some disadvantages as well. For one, if you sell it before age 8, you can sell it at a discounted price. And while buying, it may look attractive in the secondary market, given that you are buying it at a discounted price, in fact, you will still be getting interest at the price at which the first investor bought it.

Who should invest in Gold Exchange Traded Funds (ETFs) and Gold Mutual Funds (MFs)?

These were considered extremely lucrative till SBGs came to the fore, Luthria said, “Now, people may think why not invest in gold ETFs/MFs and get 2.5% p.a. interest on SGBs.” However, it considers. Don’t make gold ETFs/MFs less attractive as the convenience to buy/sell them is a significant win over SGBs.

Explaining how they work, Luthria says, gold ETFs are traded like shares in the stock market, and they hold physical gold. And for Gold MFs, he explains, “Gold ETFs and MFs are more or less the same thing, just different in structure.” Basically, all gold mutual funds invest in gold ETFs of the same company. That is, Nippon Gold MF invests in HDFC Gold ETF in Nippon Gold ETF and HDFC Gold MF.

From an inverter’s point of view, the difference is that ETFs require you to have a demat account and at the same time it is a bit difficult to opt for, meanwhile, for Gold MFs, you can pay for a small additional fee of 0.15% p.a. You can get rid of these headaches. MF House.

Who should invest in Physical Gold?

Most financial planners recommend not investing in physical gold. Luthria says, “The main reason for owning gold is once in a generation or two generations of civil war-like catastrophes. These are very rare examples of what may never happen in our lifetime.” Arguing against the idea, Iyer says, “But, it is extremely difficult to say which generation it will belong to.”

So, if you don’t want to depend entirely on the government, there’s no harm in owning a certain amount of physical gold. Iyer, however, cautions, “It is a dead investment if the value does not appreciate (although this is rare). There are other kinds of risks involved such as losing it or robbing your bank.”

Speaking about jewelry in particular, Iyer says it serves a dual purpose. You can use it and resell it when needed. However, Luthria gave them reason by saying, “If you think of gold as a form of jewelery to wear, there is also an emotional negativity associated with the sale.”

Who should invest in Digital Gold?

You can buy digital gold for Even Sachin Kothari, Director, Augmont Gold for All spoke at No. 1 from the comfort of his home, explaining the benefits of digital gold.

He further said, “For SGBs, you have to wait for RBI to issue bonds. And, for physical gold, there will be a specific denomination you have to buy for, you can’t buy for 100 or 500.”

Next comes the sales part. Kothari says, “Again, digital gold is easy to sell. SGB ​​(though it is an excellent investment option) is a long-term product, whereas for physical gold, you have to forego the making charges, storage cost (for years) etc.”

Furthermore, since digital gold is backed by physical gold, you can redeem it for the latter as well. “Therefore, it is an excellent investment option for those saving for jewellery, especially for weddings. Luthria, however, points out that “digital gold lacks regulatory oversight”, which makes it a risky bet. Is.

To address this concern, a self-regulatory system has been put in place so that customers can place their trust. Kothari explains that there is an independent monitoring agency that controls and monitors the movement of physical gold from these safes. They also regularly authenticate the amount of physical gold present in the vault.

Now, to conclude, the demand for physical gold is huge as compared to other forms of gold investment. The main reason for this is the lack of awareness about SGBs, Gold ETFs/MFs or Digital Gold. But with digitization, their demand is increasing among new-age investors, especially urban millennials.

Keeping in mind that we are talking about the same asset class, Iyer says, “The question is not whether it is suitable for a particular investor, but how it should be distributed across the portfolio. . The percentage of holding these investments may vary but gold should be part of the asset allocation anyway.”

How are various gold products taxed?