The onset of Diwali can be associated with bright lights & loud sounds, and plenty of shopping – with money frequently exchanging hands for mithai, new clothes, and higher up on the shopping list – gold. The yellow metal, usually bought in the form of jewellery & coins, is highly sought after during this period as it is considered extremely auspicious around Diwali – especially on Dhanteras.
We all know that apart from the actual material cost, the additional costs associated, including the making charges & wastage of material, are not recoverable while liquidating the asset. This coupled with storage and safety issues begs the question – should individuals still follow the age-old tradition of buying physical gold, or move towards more prudent, new-age investments?
The answer isn’t particularly straight forward. “Traditionally, Indians are known to buy and hold investments in physical gold for years, even generations. Rightfully so – considering that gold has traditionally been viewed as a safe-haven asset and a hedge against inflation. In other words, during periods of significant distress or financial market uncertainty, gold has always been able to protect a portfolio and even outperform equity. In recent history, gold outperformed other asset classes during the global financial crisis in 2008 and the subsequent recovery period up to 2011,” says Dasvir Ankhi, National Head-Wealth distribution and Advisory Business, Sales, Tata Capital.
In the aftermath of the IT bubble burst in 1999-2000 and the subsequent global economic slowdown as well, gold was seen outstripping the equity market. Financial advisors around the world have also advocated to having a small exposure to gold in their portfolio, as a form of ‘diversification’ of their funds.
“Up until now, this seemed to be the ideal way to shelter investors from an inconsistent financial market. However, there is another new-age investment avenue to quench the common Indian man and woman’s insatiable thirst for buying gold, which is even more secure and gives better returns than the traditional gold asset – ‘paper gold’. Gold ETFs and Sovereign Gold Bonds are two such avenues of investing in gold whilst avoiding some of the major disadvantages of investing in the physical asset highlighted above,” says Ankhi.
Gold ETFs work in a manner similar to any mutual fund whereby one acquires units for the amount invested, which can be redeemed at any point in time one wishes to do so. The underlying asset of this investment is physical gold itself, which is held by the registrars.
The second avenue is Sovereign Gold Bonds, initiated by the current government in 2015. These bonds have a tenure of 8 years, with an option of exiting from the 5th year onwards. The investors will earn a fixed rate of 2.50% per annum payable semi-annually on the nominal value, which is probably the most important advantage of investing in this scheme. Interestingly, “investing in this scheme does not attract GST and the capital gains on the redemption of the gold bonds at maturity are also exempt from tax – both of which are applicable when buying physical gold. Taking all the points into consideration, buying a gold bond does makes more sense than buying the physical asset as the bond will earn interest and include all the benefits in case of an appreciation in value,” advises Ankhi.
Unfortunately, the common man appears to view investments in physical gold and paper gold very differently. Despite the government’s efforts to promote this scheme and mobilize over Rs 5,400 crore towards it, the response from the public has been mild. A part of the reason for the low adoption rates can be attributed to gold buying habits – individuals find it more attractive to own the physical asset rather than owning it in the paper form. “A clue towards this behavior can be taken from the buying behavior pre-demonetization & GST – during which people preferred buying physical gold in order to hide their wealth. However, post demonetization and implementation of GST, which requires the jeweler to report the transaction, we might get to see a better response for the SGBs,” says Ankhi.
Hence, this festive season, when you have to gift your beloved ones, do consider gold in paper form rather than physical gold.