Celebrating Dhanteras: Sovereign gold bonds or gold ETF: Take your pick

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November 02, 2021 2:15 AM

A drop in gold prices is a good opportunity to buy the metal and investors must allocate 10-15% of the total portfolio to it

The bonds earn an interest of 2.5% per annum payable semi-annually apart. There’s no capital gains tax if held till maturity.

On this auspicious day of Dhanteras, purchasing gold is a much-enjoyed practice among Indian families and is considered the embodiment of Goddess Lakshmi herself. After a surge in domestic gold prices— 24% in 2019 and 28% last year—there has been a correction in gold prices this year. The fall in prices has augmented domestic gold demand.

Demand rises
In the three months to September, gold demand rose 47% year-on-year (y-o-y) to 139 tonnes as compared to 94.6 tonnes during the same quarter last year on the back of lower prices, falling Covid-19 infection rates, gradually opening of the economy along with re-stocking of inventories ahead of the festive and wedding season. The demand for jewellery rose 58% y-o-y during July–September 2021 period to 96.2 tonnes and investment demand rose 27% to 42.9 tonnes during the same period.

In a note on gold outlook, Motilal Oswal Financial Services says the current scenario could have some short-term hiccups which might give investors a better buying opportunity. “We believe that gold has a potential to surge towards $2,000 once again and might even make a new lifetime high on the Comex. On the domestic front we expect prices to surge towards highs of Rs 52,000-53,000 over the next 12 months”, it notes.

Should you buy gold?
Experts suggest a drop in gold prices is a good opportunity to buy the metal and investors must allocate 10-15% of the total portfolio to it. Chirag Mehta, senior fund manager, Alternative Investments, Quantum AMC, says gold’s utility extends beyond investment returns. “It is also a source of liquidity, a portfolio diversifier and an asset that can help combat the effects of higher inflation on a portfolio. Buying gold can thus be a good move for your overall financial wellbeing,” he says.

So, this Dhanteras invest in gold through gold exchange traded funds (ETFs) of mutual funds, Sovereign Gold Bonds (SGB) and gold coins or gold bars.

You can invest in digital gold only from wallets or non-broking platforms as the Securities and Exchange Board of India (Sebi) has asked exchanges not to let brokers sell this product. Digital gold products are bought online and held in electronic form. The sellers of digital gold keep the gold in vaults and the product is similar to gold ETF units. However, unlike ETFS which are sold by asset management companies and regulated by Sebi, digital gold products are yet to be regulated.

Gold ETFs and SGBs
For retail investors, gold exchange traded funds are an ideal way to invest in the yellow metal for investment purposes. Gold ETFs are open-ended funds and the returns are benchmarked on the real returns on investment in physical gold, subject to tracking errors. They come cheap as retail investors do not have to pay making charges that a jeweller will charge or a service charge that a bank will charge for selling gold coins or bars. Also, unlike gold in the physical form, there are no purity issues in gold ETFs.

Nitin Kabadi, head, ETF Business, ICICI Prudential AMC, says over the last couple of years, investors have increasingly preferred gold ETFs as can be seen through the rising folio count. “One can buy a gold ETF by investing an amount as low as `50 and the transaction, be it buy or sell, can be executed at any time during the trading hours on the exchanges. Another benefit is that gold ETFs are highly regulated thereby ensuring that investor interest is protected at all times. Apart from these, gold ETFs tend to be tax efficient as it is subject to long-term capital gain tax with indexation benefits,” he says.

The tenor of SGB is eight years and the buyer will have an exit option from the fifth year which can be exercised on the interest payment days. The bonds earn an interest of 2.5% per annum payable semi-annually apart. There’s no capital gains tax if held till maturity. However, if they are traded before maturity, short-term and long-term capital gains tax will be applicable.

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