Is gold better than bonds for long-term investment?
September 27, 2020 10:08 AM
When markets are sluggish or uncertain, gold prices often rally strongly but the inverse means gold prices can also be flat for years.
While gold is universally accepted as a hedge against inflation, physical gold in the form of jewelry still carries the risk of impurity and lower resale value.
Gold for most Indians is not just an investment instrument but more of an emotional investment. Higher liquidity and sentimental attachment towards the precious metal make it part of just about everyone’s portfolio.
Add to it the current uncertainties of the Covid pandemic and economic hardships; gold has witnessed more investment as an insurance against the uncertainty leading to soaring price points.
But is gold better than bonds, which have similar risk-return characteristics? Let’s find out.
There is no denying the fact that gold remains a fundamentally strong asset class. But it is not that it offers enormous returns in the long term. In fact, gold has historically offered a return of about 8.87% over the last 10 years.
Now this may well be below high-risky equity returns, the returns are still quite comparable to bonds which have offered an estimated 8.81% returns for the same period.
When markets are sluggish or uncertain, gold prices often rally strongly but the inverse means gold prices can also be flat for years. Government bonds, on the other hand, offer secured investment with benefits like cash flow, dividends, and interest income.
Safety and risk
Investment in physical gold was traditionally risky owing to storage concerns. Now, with Gold ETFs and Sovereign Gold Bonds (SGBs) available, safety and storage risks are almost at par with government bonds.
While gold is universally accepted as a hedge against inflation, physical gold in the form of jewelry still carries the risk of impurity and lower resale value. Government bonds, on the other hand, have no such limitations.
The cost of minimum investment is higher in physical gold, Gold ETFs, and SGBs as compared to government bonds. This makes government bonds more suited for a large number of investors.
For example, to invest in gold ETF or SGB, one will be required to purchase minimum 1 gram of gold (approximately Rs 5,000). Comparatively, an investment in the newly introduced floating rate savings bonds can be made with as little as Rs 1,000.
Capital gains taxation (LTCG)
Long Term Capital Gains (LTCG) tax is applicable for gold investment, be it physical gold or Gold ETFs. LTCG tax is applicable after 3 years for both physical gold and Gold ETFs. In SGBs, the capital gains tax is not levied only if investment is kept till maturity date.
In case of bonds, LTCG tax can be exempted if investment is made in certain specified government bonds. For example, one can claim capital gains tax exemption under Section 54EC if investment is done in bonds of National Highways Authority of India or Rural Electrification Corporation Limited.
Depending on the investment made in the bond scheme, TDS is usually applicable on the Interest Income. However, eligible investors have the option to submit Form 15G/H, making it suitable for older investors. TDS, however, is not applicable on interest for investments made under SGBs.
An investment for the long term may require change of plans and option of premature withdrawal should be a consideration. With physical gold and Gold ETFs, there is no lock-in period for investment. SGBs, on the other hand, come with a minimum 5-year lock-in period.
Government bonds may or may not offer premature withdrawal option and sometimes reserve it only for senior citizens and not all investors. For example, RBI’s newly-launched floating rate savings bonds scheme offers no premature withdrawal for those below 60 years of age.
For the young, investment in physical gold or Gold ETFs may, therefore, be a more lucrative option compared to government bonds having limits on premature withdrawals.
Eventually, there is no one winner in the gold versus bonds face-off. Invest depending on your time horizon and financial needs, after factoring in the characteristics of both products.