Rising inflationary trends should be conducive for gold, implying investment demand for the yellow metal will likely increase in the coming months, said analysts
Akshaya Tritiya has become synonymous with gold buying. You can use the occasion to add gold to your portfolio. According to investment advisors, investors should have a 5-15% allocation to gold, depending on their preference for the yellow metal.
According to analysts, gold prices could rise going forward. "Rising inflationary trends should be conducive for gold, implying investment demand for the yellow metal will likely increase in the coming months," said Hitesh Jain, lead analyst – institutional equities, Yes Securities.
Motilal Oswal Financial Services echoes similar views on gold prices in its Commodity Insight report. The brokerage expects prices to reach ₹50,000 per 10 grams in the near term and estimate them to be ₹56,500 per 10 grams or more over the next 12-15 months.
It lists several factors for its estimates. According to the report, market participants are cautiously watching the falling dollar, higher US treasury Yields, exchange-traded fund (ETF) demand picking up and falling global interest rates.
"Although central banks have continued to maintain a dovish stance, interest rates are near the lows. Now that central banks have started to buy again, we expect that higher numbers in the future are likely to keep prices elevated. Rising coronavirus cases, continuous liquidity injections, rising inflationary expectations, economies growing on the back of debt, Middle east tensions, trade war between US and China, and a few other factors continue to boost the sentiment and build a strong case for higher gold prices," stated the report.
Amid the lockdown in several states have imposed lockdown. If you are planning to buy gold digitally, here are some options you can explore.
SOVEREIGN GOLD BONDS
A direct substitute to holding the yellow metal in physical form, the Reserve Bank of India (RBI) issues Sovereign Gold Bonds (SGBs) in denominations of one gramme of gold and in multiples thereof.
An individual can invest up to 4 kg worth in one financial year. In the case of joint holdings, the limit applies to the first applicant. These bonds also offer an annual interest rate of 2.5 per cent on the initial investment amount.
The bonds mature after eight years, and early redemption is allowed after five years. The only problem is that these are not on tap—the government issue SGBs in tranches. For example, there is no issue of SGB on Akshaya Tritiya. An investor will either need to purchase them in the secondary market or opt for gold ETFs.
However, it isn't easy to get SGB at the right price on exchanges. Sellers, typically, as for a premium to the prevailing gold prices.
SGBs bought in the primary market are exempt from the capital gains tax if held till maturity. In the case of premature withdrawal after the fifth year, the gains are taxed at 20% with indexation benefit.
If you sell them on stock exchanges within one year of purchase, the gains are added to the income. After one year, the gains are considered as long-term capital gains and taxed at 10%.
The interest earned on SGBs is taxable, too. It is added to the overall income of the buyer and taxed as per the marginal slab rate.
Pros: An investor earns 2.5% interest every year. Investors get the prevailing gold prices at the time of redemption. There is no storage cost.
Cons: Investors may need to sell SGBs at a discount on stock exchanges if they want to exit within five years of purchase and may not get the right price.
To make physical gold more attractive, investment apps and wallets are offering digital gold. An individual can purchase gold for as low as one rupee at any time of the day. However, the buyer will need to pay the Goods and Services Tax of 3%.
Buyers can ask for delivery of physical gold once they have accumulated at least one gram of the precious metal. Alternatively, they can also sell it on the wallet or investment apps. However, there is a significant difference in the buying and selling price due to GST.
Digital gold investment is treated similar to physical gold ownership for taxation. If you sell within three years of purchase, the gains are added to the income and taxed as per the slab. Digital gold sold after three years is taxed at 20% with indexation benefit.
Pros: There are no storage charges. The option works for those seeking to buy physical gold at a later date.
Cons: They are not meant for investors as the selling price is lower than buying price. If you take physical delivery of gold, there will be making charges.
EXCHANGE TRADED FUNDS
Gold Exchange Traded Funds (ETFs) are primarily paper gold. The money you invest will be pegged to 24-carat gold. The underlying asset is gold and some cash. To invest in these ETFs, you need to open a demat account.
When you redeem, you don't get physical gold. You will get the monetary equivalent of the price of gold on the day of redemption. ETFs have two costs -- expense ratio and the cost of opening a demat account.
"Mutual Funds get an offset on the GST, which means at any sale of physical gold, they get offset benefit from the GST paid at the time of buying. Effectively this does not lead to any losses to investors on account of the GST levy. Unlike physical gold, Gold ETFs straight away saves them a 3% cost," said Chirag Mehta, senior fund manager - alternative investments, Quantum Asset Management Company.
They are taxed just like physical or digital gold.
Pros: There's no storage cost and score over others when it comes to liquidity.
Cons: Expense ratio and demat account maintenance charges
When buying gold on this Akshaya Tritiya, choose the instrument based on whether you want to invest or accumulate gold for a future event like marriage.
(Do you have personal finance queries? Send them to email@example.com and get them answered by industry experts)
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