The government has launched the gold monetisation scheme and sovereign gold bonds, which will offer 2.75% interest rate to investors. This is the first tranche of the gold bond scheme and subsequent tranches would be notified later.
Sovereign gold bonds are the alternatives of physical gold and are in form of certificates issued by the government. The certificate indicates the amount, date and the quantity of gold bought by the investor. The certificate also carries the rate of interest along with the value of gold bought. The bonds are also eligible for conversion in the demat form as is the case of exchange-traded funds (ETFs).
Gold bonds will offer an exposure to gold while offering interest, a feature that is not present in other avenues like ETFs and gold mutual funds or even physical gold. TDS (tax deducted on source) is not applicable on the interest component, but interest earned on gold bonds will be added to the income and taxed. Capital gains will be taxed at tax slab if these bonds are sold before three years. If sold after three years, a capital gains tax of 20% with indexation benefits would apply.
Traditionally, investment in physical gold was favoured by the masses. However, gold ETF has emerged as a better method of investing. Gold ETFs provide an opportunity to investors to accumulate gold over a given period of time. Since it can be purchased in small quantities, one can plan the procurement as per future requirements, say for the marriage of children, etc.
Besides, unlike gold coins and bars, for which most jewellers offer only an exchange and not a buyback, gold ETFs can be sold at transparent prices across India. As units of such funds are traded like stocks on the exchange, it is eligible for the long-term capital gains after a year, unlike physical gold, which is eligible for long-term capital gains after three years.
However, the advantages come at a cost in the case of gold ETFs. A small asset management fee is charged by the fund house, so the return is slightly less than the actual increase in the gold price. Moreover, there are additional costs involved at the time of buying and selling in the form of brokerage or commission. Another drawback with gold ETFs is liquidity; some ETFs are illiquid, which impacts their buying and selling flexibility. Hence, investors should consider this as a factor while investing in gold ETFs and should stick to funds that are liquid.
Our advice to investors is to wait and watch as liquidity will be an issue if one invests in these bonds. This issue will be addressed over a period of time as and when maximum participants invest in these bonds. However, if the scheme is successful, it will drastically reduce the gold imports in India and benefit the overall economy.
Gold ETFs are an option known to the investors for a fairly longer period of time as they are familiar with it. Liquidity is not an issue when it comes to ETFs, although; it comes at a cost like brokerage or commission. Hence, one should carefully assess all the options before investing in gold bonds.
The writer is associate director, commodities & currencies, Angel Commodities Broking