Indians are passionate about gold, especially during festivals like Diwali, Dhanteras, and Akshay Tritiya. According to a World Gold Council (WGC) report, during the third quarter of this year, India saw a 10% increase in demand for yellow metal, reaching 210.2 tonnes. At the same time, purchases of gold bars and coins reached 55 tonnes, the highest level since 2015.
Physical gold has more drawbacks than benefits. It can be lost or stolen, and even storing it in a secure location—like a locker—can result in additional fees.
Purchasing physical gold only has the benefit of providing emotional fulfilment. However, investors may now choose digital gold with ease. Sovereign gold bonds, gold exchange-traded funds, and gold mutual funds are available to investors.
In addition, gold is seen as a haven investment in difficult geopolitical times. This is because investors frequently chase gold during times of crisis since it is regarded as a reliable store of value. As a result, during times of economic volatility, gold prices may increase.
As opposed to gold bars or coins, actual gold may have a lower resale value when investing in it. When buying physical gold, you might pay more than the going rate, and when you sell, you might get offers that are less than the going rate.
Physical gold also raises security issues because of the possibility of theft, particularly when kept at home. Thus, if the intention is to invest a larger amount, digital gold is advised.
“Retail investors should have less than 10% gold in their portfolio to hedge against unfavourable market scenarios such as wars, prolonged bear markets, and similar market risks. “Given the current geopolitical conflicts and supply chain disruptions, investors can allocate to the yellow metal,” said Anshul Gupta, Co-Founder and Chief Investment Officer, at Wint Wealth.
According to Motilal Oswal, unlike real gold prices, which fluctuate throughout India based on geography and the demand-supply dynamic, gold exchange-traded funds (ETFs) are passively managed and accurately reflect the current gold prices. Furthermore, compared to purchasing or selling actual gold, gold ETFs incur lower costs.
Gold ETFs are bought by schemes that are invested in by gold mutual funds. The value of actual gold is reflected in the units of gold ETF schemes, which are tracked by gold mutual funds. The performance of the underlying asset determines how much money these mutual funds make. Returns on gold mutual funds are impacted by changes in the NAV of gold ETF units.
“If you’re considering investing in physical gold for its traditional significance, it might be prudent to limit your investment size. Other investment avenues may offer more advantages. Gold mutual funds, though not directly tied to physical gold, provide exposure to gold mining companies and gold ETFs. They offer a low entry point, starting investments from as little as Rs 1000 and allowing systematic investment through SIPs. However, there might be expenses in the form of an expense ratio and exit load if redeemed within a year. For those seeking to invest in gold gradually, gold mutual funds could be a viable choice,” said Adhil Shetty, CEO of Bankbazaar.
However, because gold ETFs are traded on the stock market, investors can buy and sell in real-time during business hours. You can start investing with as little as one gram of gold, which will be safely placed in your demat account. The transaction fees for purchasing and selling gold ETFs are significantly less than those for actual gold, even though there are annual demat fees.
“A key point to note is that gold ETF investments do not result in physical gold delivery. If you wish to obtain physical gold in the future, you can liquidate your gold ETF holdings and use the proceeds to purchase gold from the market. The price of gold is also influenced by the international economic landscape. In the medium to long term, gold prices are anticipated to increase due to various factors such as ongoing geopolitical issues, escalating crude oil prices, and inflation,” said Shetty.
According to Gupta, gold ETFs are more efficient than gold-based active mutual funds because their expense ratios are significantly lower.
Mutual funds, on the other hand, make systematic gold investing more convenient because you can purchase gold in multiples of Rs 500 rather than having to pay a variable amount for ETFs that fluctuate based on the price of one gram of gold. “If you are one of those who like to automate your investments, mutual funds are the right way to accumulate gold,” Gupta stated.
Sovereign gold bonds (SGBs) are a better option for gold investors than exchange-traded funds (ETFs). In addition to the appreciation in the value of gold that these bonds would yield, they offer a 2.5 percent annual rate of interest; gold ETFs only yield increases in the value of gold. Sovereign gold bonds yield an additional 2.5% return.
” Sovereign gold bonds don’t have any ongoing cost of ownership, and gold ETFs have an expense ratio of around 1 per cent. So that’s a cost that investors who remain invested in the gold ETFs have to pay. SGBs trump over gold ETFs.SGBs are miles ahead of gold ETFs in taxation. In the case of SGBs, the capital gains you make on the appreciation in the price of the gold are completely tax-free. You only have to pay tax on the 2.5 per cent interest, which gets added to your income and taxed per the slab system. In contrast to that, in the case of gold ETFs, you have to pay capital gains tax on the price appreciation of gold that you achieve, and they are taxed as a non-equity capital gain,” explained Value Research in a note.
The RBI’s SGBs are a dependable and secure substitute for actual gold holdings.
Benefits according to Value Research:
The stock exchange offers SGB at a discounted price, allowing you to purchase more for the same sum of money.
Your income is tax-free if you retain SGBs until they mature, which takes eight years.
Furthermore, they guarantee an annual return of 2.5 percent, which is higher than the cost of actual gold.
Even though the interest is taxable, some investors may find it to be a tempting alternative because it is paid equally twice a year.
