Gold Investment options

Buying Jewellery for gold? I have got better deal for you

Since ancient civilization, from the Egyptians to the Inca, gold has held a special place of actual and symbolic value for humanity. And same shall continue for ages to come.

There have always been a famous saying that ‘We should not put all eggs in one basket’. Asset allocation is a very important part of creating and balancing your investment portfolio. All strategies should use an asset mix that reflects your goals and should account for your risk tolerance and length of investment time.

Financial experts always have suggested that an investment portfolio should have at least 10%-20% of assets invested in gold. The main reason for this is that the yellow metal acts as a perfect hedge against inflation and currency risk.

Investing in gold can be done by purchasing gold coins, gold biscuits or even Sovereign Gold Bonds and Gold ETF.  Here in this article, we will analysis which one is best way to invest in gold?

Physical gold

PROS

1. Cash buy can be done, can be kept highly confidential and shall be difficult to trace

2. Liquidity is never an issue as you can sell it anytime you want. Even physical gold is accepted universally and liquidated anywhere in world.

3. All other assets can vanish in the event of a market or economic collapse, but the actual gold one owns will remain

4. The investment can be used as collateral for loans

5. In press release dated December 1, 2016 by CBDT, it was clarified that there is no limit on holding of gold jewelry or ornaments by anybody provided it is acquired from explained sources of income, including inheritance.

CONS

1. Making charges is really high, sometimes even upto 35%. However, while selling the same, jeweler does not consider the same charges/ wastage

2. Short term capital gain (less than 3 years)- added to overall income. Long term capital gain(more than 3 years)- 20% tax with indexation benefits. Moreover, there extra 4% surcharge is applicable.

3. 3 % GST chargeable on total purchase value including making charges (if any)

4. In case you are getting an old gold ornament redesigned, GST at the rate of 18% will be levied on the making charges as here you are providing your own gold

5. Physical gold’s purity may or may not be 99.5%.

6. Not 100 % theft free

7. No passive income is created. What is passive income? Well, if you invest in rental property (for instance), you can put that on rent and earn rent out of it. If you put your money in stock or mutual funds, you can earn dividend income out of it. However, gold as an assets fails to generate regular income

Suggestion:- Avoid. If look into investing through physical gold, making charges are irrecoverable on resale, high markup for support services. People pay taxes, they pay the jeweller and the designer, they pay the bank to store it, and other than the certified bullion, they sell the jewellery in less than the market rate.

Digital gold-

Buying from platforms like Paytm, Google pay, Phonepe, Safegold, etc. Apps and websites like Paytm, G-Pay etc only provide a platform for metal trading companies SafeGold and MMTC PAMP. Once you invest in digital gold, these trading companies purchase an equivalent amount of physical gold and store it under your name in secured vaults.

PROS

1. You can invest an amount as low as Re.1.

2. Digital Gold can be used as collateral for online loans

3. Also can take physical delivery of gold at your doorstep

4. Digital Gold is genuine and the purity is 24K 99.5% for Safe Gold and 999.9 in case of MMTC PAMP purchases

5. You can exchange digital gold for physical jewellery or gold coins and bullion

CONS

1. One of the advantages of digital gold is that it provides the option to take physical delivery of gold. So, you might have to pay delivery charges. In addition, if you are converting your digital gold investment into physical gold then there might be some making charges involved.

2. The platforms that offer gold online charge 2%-3% as a management fee, storage costs and insurance

3. Limit of Rs.2 lakhs for investment on most platforms

4. GST charges same as physical gold

5. Taxation same as Physical gold

6. Lack of an official government-run regulating body such as RBI or SEBI

7. In some cases, companies only offer a limited storage period, after which you either have to take physical delivery or sell the gold. For example, after five years, the investor will have to pay extra charges decided by MMTC-PAMP, if the delivery is not taken.

Suggestion

Avoid. Major risk being absence of regulator.

Gold ETF

Open ended mutual funds that has gold as underlying assets. Prices are based on physical gold. One gram of gold equals to one unit of that ETF

PROS

1. Gold ETFs provide lot of liquidity. You can purchase and sale them very easily.

2. In physical gold there is a lot of scope for price disparity. The price may vary from jeweler to jeweler, bank to bank. However Gold ETF prices are based on actual prices of gold.

3. Gold ETFs are available in small denominations. As low as 1 gm you can invest and no limit on higher side as well.

4. Purity is never an issue

5. No GST levied on Gold ETF

CONS

1. Even though there are no entry or exit charges, you should factor in these three costs. First, is the expense ratio (for managing the fund) of around 1 percent (different etf has different expense ratio). Second, is the broker cost that needs to be accounted every time you buy or sell gold ETF units. Third, which technically is not a charge but impact’s returns is the tracking error. It arises because of the fund’s expenses and cash holdings, thus not mirroring actual gold prices. Lower the tracking error, better ETF

2. Taxation same as physical and digital gold

Suggestion:- Better than physical and digital gold. Simply put, owing a unit of gold ETF is cheaper than owning one gram of real gold.

Sovereign gold bonds

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.

PROS

1. Always issued at discount than the current market price. However, if you hold the bond until maturity, then you will receive the market price of gold.

2. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated.

3. Transferability of Bond is not a problem.

4. No GST

5. Taxation benefits for individuals, if held till maturity (which is 8 years)- no capital gain.

6. Additional Interest income of 2.5% p.a on amount of intial investment

7. Purity and sovereign guarantee is never an issue

CONS

1. Not backed by physical gold purchase as in digital gold or ETF.

2. You have maturity of 8 years, however early redemption of the bond is allowed after fifth year from the date of issue on coupon payment dates. Value of secondary market shall be used in that case.

3. Interest shall be taxed at marginal rate of tax and shall be taxed under other source of income

4. The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment are as follows:-

Suggestion:- Recommended. Only drawback is lock in period is comparatively higher.

Note:- Most importantly, it is essential to zero down the objective of the investment- whether it is long term or short term, whether it is for education, marriage, retirement or wealth creation; before making a choice.