Gold must be on top of your mind with Dhanteras being celebrated in most parts of India today. However, how and where should you invest in gold?
Gold mutual funds are open-ended investments, based on the units provided by the Gold Exchange Traded Fund.
Many in India purchase gold jewellery and coins during Dhanteras for a traditional, consumption-oriented requirement. This could remain the same this year too, especially considering the fact that gold prices have increased by over 31% in the last one year mainly due to the economic uncertainties brought about by the Covid-19 pandemic.
From an investment perspective, however, there are also other ways to invest in gold apart from buying physical gold items. Traditional reasons aside, if you are looking for a way to safely invest in the yellow metal, Sovereign Gold Bonds (SGBs) could be your best alternative, especially if you have a long investment window of 5-8 years. The central bank issues SGBs multiple times in a year and fixes a price for each issuance.
You can also buy or sell SGBs in the secondary market. You can invest anywhere from one gram to four kilograms of gold in SGBs. “These are safe as they are issued by the government and the returns are proportional to the returns on gold. They also have an additional fixed interest rate of 2.5% per annum. The capital gains from the gold bonds are also tax-free. This makes it very similar to holding physical gold with a 2.5% annual bonus. On the flip side, SGBs have a lock-in period of 5 years and you can use exit options only from the fifth, sixth and seventh years on the interest payment dates. Alternatively, if you need to exit before 5 years, you will have to sell the SGB on the stock exchanges,” says Adhil Shetty, CEO, BankBazaar.
If you are looking for a more liquid option, you can consider gold ETFs. Gold ETFs allow you to invest in gold in a dematerialized format, which can be bought and sold on the stock exchange just like shares. The unit price of any ETF is typically linked to the price of one gram of 24k gold. These provide returns proportional to the returns on gold and are good options if your investment window is shorter.
However, unlike SGBs, there is no fixed interest income over and above the selling price of gold in case of ETFs. Gains from ETFs are also taxable. Short-term gains are taxed as per your income tax slab and long-term gains are taxed at 20.6% with indexation benefits. However, do keep in mind that you need to have a demat account to invest in gold ETFs.
You can also invest in gold mutual funds, especially if you are looking to make regular investments instead of a one-shot investment. Gold mutual funds are open-ended investments, based on the units provided by the Gold Exchange Traded Fund. Many mutual fund houses closely track the value of gold and have gold-backed mutual funds that you can invest in via SIPs. This makes it very rewarding to invest. Units of gold funds can be redeemed by selling them back to the fund house based on the NAV for the day. However, unlike ETFs, gold MFs may have an exit load, making them more expensive.
“From an investment perspective, however, you should invest in gold only after assessing your existing portfolio and evaluating your returns expectations, risk appetite and liquidity requirements. Ideally, gold should not form more than 5-10% of your investment portfolio, as gold prices tend to flat-line over long periods of time. So, despite the recent upward trend, gold alone may not be sufficient to meet your financial goals on time in the long run,” informs Shetty.