As equity market is volatile and debt market yield is low, invest in gold via Sovereign Gold Bonds or ETFs for higher returns
As uncertainties continue to loom over global economic growth, gold prices are touching new highs. While returns from equity have been volatile since the beginning of the year, returns from gold have moved up. From January to June this year, while the Sensex has given negative returns of 13%, gold has given 23% returns. In the last 18 months, the precious metal has given over 50% returns and is likely to move up further.
Globally, investors look at gold as a safe haven during tough times. Concerns of a quick global economic recovery and a weak US dollar will continue to lift the safe haven demand of the precious metal.
The macroeconomic backdrop has become increasingly favourable for gold. Chirag Mehta, senior fund manager, Alternative Investments, Quantum AMC says, economic deceleration, higher risk and uncertainty, lower opportunity cost in the form of low/negative interest rates and competitive debasement of currencies due to unprecedented stimulus measures will likely be supportive of gold investment demand in 2020. “Though gold’s behaviour in the coming quarters will depend on the speed of global economic recovery and the duration and extent of monetary and fiscal stimulus, the metal will play a risk-reducing, return-enhancing role over the long-term. We reckon the current prices will be a good entry point for investors to accumulate long-term positions in the asset class in a staggered way,” he says.
Similarly, Lakshmi Iyer, chief investment officer (Debt) & head products, Kotak Mahindra Asset Management Company, says, gold has been on a dream run given the risk aversion sentiment prevailing. “World ETFs holding have been steadily on the rise and looks like the momentum may continue. Gold prices may take smaller breathers, but so long as uncertainty on Covid-19 prevails, prices may continue the northward journey,” she underlines.
Buying the precious metal
Investment in gold is a useful diversification tool. Ideally, one must invest 10-15% of the portfolio in gold. However, investment in physical gold is ineffective because of the loss in value on resale. Making charges at 6-14% (25% in case of special designs) are irrecoverable. The 3% GST paid on gold jewellery cannot be recovered on resale. Even gold coins and bars are not an ideal form of investment. The purchase of gold coins and bars comes at a premium of 5-15% and the GST paid remains irrecoverable on sale. Also, the lower the denomination of the coins or bars you purchase, the higher is the premium.
Sovereign Gold Bond (SGB) and gold exchange traded funds (ETFs) of mutual funds are an efficient way to invest in the precious metal. The minimum investment in SGB is one gram and the maximum limit of subscription per fiscal year is four kilograms. The next tranche for subscription to SGBs will be July 6-10, August 3-7 and August 31-September 4. Interest rate of SGBs is 2.5%, payable biannually and the tenor is eight years. However, the buyer will have an exit option from the fifth year which can be exercised on the interest payment days. An investor does not have to pay any charge for buying SGBs in the primary market. However, on buying from the secondary market, you have to pay one-time brokerage. If SGBs are held till maturity, then there is no capital gains tax. If traded before maturity, short-term and long-term capital gains tax are applicable.
On the other hand, gold ETFs are mutual funds that invest in physical gold. Investors in gold ETFs do not bear making charges or storage costs associated with physical gold holdings. These ETFs are traded on the stock exchange at the prevailing market price of physical gold. So, investors can buy or sell their holdings at close to the market price, without worrying about paying a premium on purchase or selling at a discount. Gold ETFs are more liquid than SGBs.