7 MinsJune 05, 2020
In 2019, gold posted an absolute return of nearly +25% in Indian rupee terms. Amidst the unprecedented COVID-19 outbreak, the spotlight continues to remain on gold as price per 10 gms had hit an all-time high and on a year-to-date* basis this calendar year gold gained by another +20.0%.
The yellow metal has clearly played (and is still playing) its role of an effective portfolio diversifier, a hedge (when other asset classes have failed to post alluring returns) and commanded a store of value in these uncertain times. Going forward too, gold will continue to exhibit its lustre.
Why you should invest in gold?
According to the World Gold Council (WGC), gold may continue to remain in focus this year because of various factors which include the market risk, weakening in global economic growth, financial uncertainty, lower interest rates and the uncertainty brought about by the novel Coronavirus. In such times, it becomes important to tactically allocate to gold.
It would be a sensible and smart strategy to allocate at least 5-10% of your entire investment portfolio to gold and hold it with a long-term investment horizon, that is, five to seven years or more.
Modes of investing in gold as a financial instrument
You can always consider Gold Exchange Traded Funds, Gold Saving Funds, Sovereign Gold Bonds, and/or Digital Gold.
1. Gold Exchange Traded Funds (Gold ETFs)
What is it: Gold ETFs are open-ended exchange-traded funds (offered by mutual funds) which track the price of gold. Each unit of the gold ETF that you buy is equal to 1 gram of gold (some mutual fund houses also offer 1 unit at 0.5 gram of gold). The returns generated are broadly in line with the performance of gold (the domestic price of gold).
How to invest: To purchase units of gold ETFs, a demat account and a share trading account is necessary. Gold ETFs are also listed on the stock exchange, one can get real-time price updates, buy and sell continuously at market prices.
2. Gold Saving Funds
What is it: It is an open-ended Fund of Fund scheme (offered by mutual fund houses) that invests in Gold ETFs. Thus, returns generated are based on the returns generated by the underlying Gold ETF.
How to invest: You can buy a Gold Savings Fund from the respective fund house, without a demat account. The units allotted reflect in your mutual fund account statement. The units are purchased/sold at the prevailing NAV which is declared by the fund house. Investment in a Gold
Savings Fund can be either done via lump sum or through SIP (Systematic Investment Plan). The minimum investment amount to invest in a Gold Savings Fund is Rs 5,000; for additional purchase, the minimum amount usually in multiples of Rs 100; while the minimum SIP amount required is Rs 1,000 (with minimum 36 instalments). SIP route is better if you wish to invest in gold regularly, systematically and in a disciplined manner.
3. Sovereign Gold Bonds (SGBs)
What is it: SGBs are issued by the Reserve Bank of India (RBI) on behalf of the government at the issue price. They are issued in denominations of 1 gram of gold and in multiples thereof. The maturity period is eight years, with a lock-in period of five years, after which you have an option to redeem it. The bonds are eligible for conversion into demat form.
During the holding period, you will earn an interest of 2.50% p.a. (fixed rate) on the initial investment. The interest is credited semi-annually to your bank account and the last interest is payable on maturity along with a lump sum amount which is equivalent to the price of gold prevailing at that time. Thus, you earn interest during the holding period and a lump sum on maturity.
How to invest: You can invest in SGBs when they open for subscription, as per the tranches which are decided by the RBI. The RBI announces the dates when the bonds open for subscription. Look out for them. Third tranche of the 2020-21 series is set to open for subscription on Monday, June 8 till June 12, 2020.
The application form for SGBs are available with issuing banks ––Axis Bank is one of them , with designated Post Offices/agents or you can download it from the RBI website. There is an advantage if you apply digitally. The issue price of the SGB will be Rs 50 per gram less than the nominal value when applied online and the payment is made through digital mode.
The minimum investment is 1 gram, while the maximum buying limit is 4 kg for individuals/Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities. This is notified by the government for each financial year.
4. Digital Gold
What is it: Digital Gold is an avenue for you to invest in gold online! It could be through your internet banking account, mobile wallet, or UPI handle. It allows you to conveniently and securely buy physical 24k gold online. A trustee vets the quality, safety and insurance of the gold bought by the digital wallets on behalf of investors and the gold purchased on behalf of the customer shall be stored with a reputed custodian on a consolidated basis i.e. daily purchase across all the customers.
How to invest: Since the transaction is digital, you can buy it at the market rate. The minimum investment can be as little as Re 1 in certain cases. Whenever you wish to liquidate your gold holdings, you can sell it online at the applicable market rate in just a few clicks. Alternatively, you can also take delivery of physical gold.
Tax treatment: The Capital gains tax implications when you sell Gold ETFs, Gold Savings Funds and Digital Gold are the same as when you sell physical gold. Short-term capital gains tax is applicable if you sell within three years, the gains are added to the gross total income and taxed as per your tax bracket. If you sell after three years, you pay long-term capital gains (LTCG) tax at the rate of 20% (plus cess and surcharge) with the indexation benefit.
But for SGBs, the interest earned on SGBs is taxable under “Income from Other Sources” as per the provision of Income Tax Act, 1961. The capital gains arising on the exit at maturity, i.e. at the end of 8 years, are exempt as per the current tax laws. If you exit the scheme after the lock-in period of 5 years, LTCG tax will apply. But you can claim indexation benefit, which will consider the impact of inflation and thereby reduce your tax impact.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.