Which is the best way to invest in gold?
Indian spot gold prices surged to over ₹50,000 per 10 gram for the first time ever on WednesdayYear to date, gold prices are up 28%
PremiumIndian spot gold prices surged to over ₹50,000 per 10 gram for the first time ever on Wednesday. Year to date, gold prices are up 28% in the spot market. the yellow metal has been on a rising spree for sometime now. Gold is the most rewarding asset class in terms of its recent returns. This kind of performance will attract many retail investors who are spooked by the unexpectedly lower returns in equity markets. So, the big question: how do you buy gold?
Buying gold jewellery and investing in gold are not same
Indians' love for gold jewellery is inevitable. But most investment managers argue that buying gold in form of jewellery should not be mistaken as in investment. They say the costs such as the making charges which can go upto as high as 25% of the price and GST, are irrecoverable on resale.
Investors should avoid gold coins and bars as well. These can be bought at a premium of around 10%, which is irrecoverable at the time of resale.
Smart way to buy gold
Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bond (SGB), issued by the Government of India are the smart ways to invest in gold.
Gold ETFs are listed on the exchanges and invest in physical gold. Each unit of a Gold ETF represents 1/2 gram of 24 karat physical gold. Gold ETFs provide ample liquidity as these can be sold on exchanges anytime.
"Investors in Gold ETFs do not bear any making charges or premium. Also, they don't have to worry about purity, storage and insurance of gold. Moreover, Gold ETFs are traded on the exchange at the prevailing market price of physical gold, thus investors can buy or sell holdings at close to the market price, without paying a premium on purchase or selling at a discount," says Chirag Mehta, Senior Fund Manager, Quantum Asset Management.
SGBs are government securities denominated in grams of gold. The Bond is issued by Reserve Bank on behalf of the GOI.. The Bonds are issued in denominations of one gram of gold. An individual can invest maximum for up to 4 kg of gold through SGBs, in a fiscal year. The Bonds bear fixed interest at the rate of 2.50 % per annum , payable semi-annually. SGBs assure market price of gold at the time of selling.
SGBs come with a tenor of 8 years. It allows early redemption only after the fifth year from the date of issue. The bond is tradable on exchanges, if held in demat form. But low trade volumes can be a hinderance. It can also be transferred to any other eligible investor.
How are Gold ETFs and SGBs taxed?
Capital gains on goold ETFs are taxed at 20% after indexation if held for over three years.
Interest on the SGBs will be taxable. The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.
SGBs vs Gold ETF: which is better?
You can decide as per you need. If liquidity is not an issue and you are investing for long term, go for SGBs.
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