Dhanteras 2021: Physical gold, digital gold, gold ETF, gold mutual fund, or Sovereign Gold Bonds? What to buy this Diwali? Check what experts advise
Investment in a Gold mutual fund can be made even without a demat account unlike in gold ETFs, where a demat account is mandatory.
Being the oldest method of investment, physical gold includes investing in gold bars/ coins and jewellery. Investing in bars and coins are always profitable than jewellery as the latter has higher making charges. There is a risk of theft and purity issues for physical gold, but it’s the one asset that can be kept completely private and confidential.
Digital Gold is buying gold online, which enables you to hold 24K gold virtually without owning a safe/bank locker. The seller keeps an equivalent weight of physical gold in a secure vault for each online buy. However, the risk is that there is no regulatory oversight by a regulatory body such as SEBI or RBI. Currently, 3 players dominate this market in India – Augmont Gold, MMTC-PAMP India, and SafeGold, which also increases the overall risk of the investment. Investors can invest in digital gold via Google pay, Phonepe, and Paytm, etc.
Gold ETF is an exchange-traded fund that aims to track the domestic physical gold price and is stored in your Demat account. They are passive investment instruments, representing physical gold and is backed by physical gold of very high purity. Gold ETFs combine the simplicity of gold investments and flexibility of stock investment as they are listed and traded on the NSE and BSE like a stock of any company. The risk associated is a market risk due to the potential volatility of gold prices.
Gold funds are open-ended funds, which invest in units of gold ETFs as an underlying asset. Investment in a Gold mutual fund can be made even without a Demat account unlike in gold ETFs, where a Demat account is mandatory. Here, you may enjoy the similar benefit of holding gold physically along with professional fund management. The risks associated are the market risk related to the volatility of gold prices.
The Sovereign Gold Bonds (SGB) are considered to be substituted for holding physical gold and are government securities denominated in grams of gold issued by RBI on behalf of the government of India (GoI). It’s not backed by physical gold and is instead a derivative of gold issued by the GoI through the RBI. SGBs offer guaranteed periodic interest payments @2.5% p.a. along with the return of principal to the investors at maturity. In fact, there is currently Rs 50 per gram discount for the online purchase of these sovereign bonds. They are released by the RBI periodically, usually at intervals of 1-2 months and the buying window is open for 5 days at a time.
(Source: Anand Rathi)
Physical Gold, Digital Gold, Gold ETF, and Gold Mutual Funds: Highly liquid as they can be bought and sold quite easily hence can be considered liquid investments.
Sovereign Gold Bond: Maturity period – 8 years. Lock-in period – 5 years, premature encashment can be made after 5 years. There is another option of selling SGBs in the secondary market, i.e. stock market. This can be done at any time after the completion of 6 months from the date of issue. However, typically this secondary market features low volumes, so you might have to sell your bonds at a discount as compared to the market price of Gold.
Comparing the risk and returns, total cost, investment amount, liquidity, and taxation of different gold investment instruments in India, Jigar Trivedi, Commodity - Fundamental Analyst, Anand Rathi believes that for long term investments (>5 years) in gold, SGBs are considered as the best option in the industry, since they give the maximum return on investment. SGB provides an annual interest of 2.5% and also a tax-free redemption after the lock-in period of 5 years, providing the investors with maximum profits.
He further added that for short- and medium-term investors, whose investment horizon is less than 5 years, Gold ETFs and Gold Mutual funds are recommended. This is because the annual total cost stays less than 2% and they are highly liquid and can be bought and sold easily.
“We would also like to stay away from Physical gold and Digital gold from an investment perspective due to the higher costs incurred and high buy-sell spreads. The risk is also comparatively higher for these, compared to other instruments,” Trivedi of Anand Rathi said.
Similarly, Manikaran Singal, Investment Advisor (Sebi registered) at goodmoneying.com, said: “Definitely gold bonds are good unless you are buying in the form of jewellery, which is considered as consumption expenditure rather than investment. For the investment to be considered as good it has to be cost-effective and tax-efficient, and both these features are in sovereign gold bonds.”
“SGB does not attract any capital gain tax on maturity and being a financial instrument issued by GOI it has no cost attached unlike making charges, and insurance charges in gold jewellery. Even some cost is attached in gold coins and other forms of physical gold too. Besides the investors also gets annual interest in SGB investment,” he added.
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(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)
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