On the auspicious occasion of Akshaya Tritiya on Saturday, investors should consider investing in gold and spread their purchases over a longer period of time as the yellow metal will remain in focus due to recession fears in the US and uncertainties in global equity markets. From last year’s Akshaya Tritiya (May 3, 2022), gold prices have moved up over 18% to touch Rs 60,000.
Usually, gold acts as a hedge against inflation and protects capital when the equity markets are volatile. In rupee terms, gold prices have doubled since 2013 on an absolute basis. In the last 10 years, gold has delivered compounded returns of 7.5%, in rupee terms. The yellow metal is a hedge against uncertainty and provides diversification in a portfolio.
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Investing in gold can be a good way for investors to diversify their currency-denominated wealth into assets that can preserve value over the long term. Naveen KR, senior director, Investment Products, Windmill Capital & smallcase manager says, “While foreign institutional investors buying into the equity markets in the past few sessions is a boost for equity markets, the volatility there will keep precious metals an attractive space to park funds.” Windmill Capital expects gold to give 12% returns in the current financial year.
While most individuals will like to buy physical gold, they should also look at sovereign gold bonds (SGB) or Gold ETFs for diversification.
Sovereign gold bonds
After the amendments to the Finance Bill, 2023, investing in sovereign gold bonds has become more attractive. The bonds are issued by Reserve Bank of India in multiple tranches throughout the year and pay an interest rate of 2.5%. Investors can buy the bonds from the secondary market, too. The tenor of the bond is eight years and the buyer can exit from the fifth year onwards which can be exercised on the interest payment days. The bonds do not attract any capital gains tax if redeemed on maturity. Interest income is taxed at the individual’s tax slab.
However, those investing in physical gold will continue to benefit from LTCG tax at 20% with indexation, when the metal is sold after three years of purchase. This will create a tax arbitrage between physical gold and gold ETFs.
Gold ETFs sold by asset management companies are backed by 24-karat physical gold bullion of 99% purity or above and are traded on the exchanges at the prevailing market price of physical gold. Some of the advantages of investing in Gold ETF include convenience to buy and sell gold ETF units like an equity share through a trading account, which can be stored in a demat account.
Though Gold ETFs have lost the tax advantages of long-term capital gains with indexation from April 1, investors should consider them for transparent pricing, nil storage charges and easy liquidity. The gains at the time of redemption will be taxed at the individual’s slab rate irrespective of the period of holding.
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“Investing in Gold ETFs will not only bring diversification to your portfolio but also offer easy liquidity, an aspect which physical gold does not offer. An investor can consider allocating up to 10% of the portfolio towards Gold ETFs,” says Chintan Haria, head, Investment Strategy, ICICI Prudential AMC. In fact, in FY23, gold ETFs reported inflow of Rs 653 crore as gold as an asset class typically witnesses a surge during periods of high inflation.
* With no LTCG tax benefits on gold funds, sovereign gold bonds ares now more attractive
* Those buying physical gold will however benefit from LTCG tax at 20% with indexation on selling after three years
* Gold is likely to give 12% returns in the current financial year, making it a good place to park funds