THE WHY
Gold has been a perfect hedge against major events affecting capital markets, currencies, economies globally. In the financial crisis of 1970, 2000, 2008 and now the 2020 Covid-19 crisis, gold has demonstrated solidity. It has preserved the value during the crisis and this quality validates the stability of gold and its attractiveness over time.
Safety, liquidity, and returns are the three criteria most risk-averse investors look for before making any investment. While gold meets the first two criteria without any hiccups, it doesn’t perform poorly at the last one either. Here is why you should invest in gold:
1. Investing in gold is rewarding because it is an inflation-beating investment. Over time, the return on gold investment has been in line with the inflation rate.
2. Gold has inverse relationship with the equity investments. If the equity markets shows a downward trend, gold would perform well. Hence, gold as an option in your investment portfolio will be a buffer to the overall volatility of your portfolio.
HOW MUCH
Gold can form around 10% of your investment portfolio with the impending global recession, stimulus packages being generously doled out as well as uncertainties on oil and other asset classes looming.
THE HOW – SEVEN WAYS OF INVESTING IN GOLD
You can own gold in two forms – Physical or paper form. First option is you can buy it physically in the form of jewellery, coins, and gold bars and for paper gold you can use gold exchange traded funds (ETFs) and sovereign gold bonds (SGBs). Then there are gold mutual funds which further invest in gold Exchange traded funds or in the shares of international gold mining companies.
PHYSICAL GOLD
1) Jewellery
Indians love possessing gold. But to own it in the form of jewellery has its own concerns about safety, outdated designs and high costs. The unbearable ‘making charges’, which could prove to be a costly affair. The charges typically ranges between 6 percent and 14 percent of the cost of gold (even as high as 25 percent in case of special designs) are irrecoverable.
PAN card copy need to submited to the jeweller only if you are purchasing gold coins or gold jewellery in cash of Rs. 2,00,000 or more. In other instances, PAN copy is not required if the payment is been made via cheque or credit/debit card, even if the purchased gold price is more than Rs. 2,00,000.
2) Gold Coin Scheme
We can buy gold coins from jewellers, banks, non-banking finance companies, and even e-commerce websites these days. The coins which has National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other are made available in denominations of 5 and 10 grams while the bars will be for 20 grams.
The Gold Coin and Bar will be of 24 karat purity and 999 fineness carrying advanced anti-counterfeit features and tamper proof packaging which will be hallmarked as per the BIS standards. The coins are currently distributed through designated MMTC ( Metals and Minerals Trading Corporation of India) outlets and through specified bank branches and post offices. MMTC has a transparent ‘buy back’ option for Coins through its showrooms across India wherein MMTC will offer to repurchase the Gold Coin, if the tamper proof packaging is intact and with original invoice, at the prevailing gold base rate.
3) Gold savings schemes
Gold savings schemes come in two forms. The first one which allows you to deposit a fixed amount every month for the chosen tenure. Once the term ends, you can buy gold (from the same jeweller) at a value which is equivalent to the total money deposited, including a bonus amount at the gold price prevailing on maturity.
Taxation of Physical Gold
Goods and Service Tax (GST) will be charged at the time of buying at 3 per cent on the value of gold plus making charges.
The taxation of physical gold depends on how long you have held the gold jewellery/coins. The gains arising from the sale of gold will be short-term or long-term capital gains based on the time period for which the gold has been held.
If the difference between the date of buying and selling is less than three years (36 months), then you will end up paying tax on short term capital gains which will be added to your gross total income and taxed at the income tax rates applicable to your income slab.
You will end up paying tax on Long term capital gain, If the difference between date of buying and selling exceeds the period of three years (36 months), which are taxed at 20 per cent along with surcharge, if applicable, plus cess at 4 per cent. You can avail the indexation benefit while paying tax on LTCG.
If in Income Tax Return the income shown is more than Rs. 50 Lakh then information of gold and ornaments is required to be given by an Individual.
PAPER GOLD
4) Gold exchange traded funds (ETF)
Why GOLD ETF?
One of the most cost-effective manner of owning paper gold is through gold exchange traded funds (Gold ETF). The buying and selling of investments happens on a stock exchange (NSE or BSE) with gold as the underlying asset. What’s more, the high initial buying and even selling charges that go into owning jewellery, bars or coins gives an extra edge to the low-cost gold ETF. The transparency in pricing is another advantage. You can buy Gold ETF at a price which is probably the closest to the actual price of gold.
WHAT DO YOU NEED TO DEAL WITH GOLD ETF?
What you need is a trading account with a stock broker and a demat account.
What are the costs involved with Gold ETF’s?
- First is the expense ratio (for managing the fund) which is generally low compared to other mutual funds and is around 1 percent.
- Broker cost that needs to be accounted for every time you buy or sell gold ETF units would be the second one
- Third is the tracking error, which basically is not a charge but impact returns. When the fund’s expenses and cash holdings does not mirror actual gold price, tracking error arises. In simple terms, it is the difference between the return an investor received and that of the benchmark the fund is trying to imitate.
5) Sovereign Gold Bonds (SGB)
Who issues SGB?
Sovereign Gold Bond is issued by the government at an annual interest rate of 2.5% where the government will intermittently open a window for the fresh sale of SGBs to investors. This issuance happens every 2-3 months and the window remains open for about a week. The Reserve bank of India recently announced issue of SGB Series 1 for FY 2020-21 in monthly trances. The first tranche was open between 20th April 2020 till 24th April, 2020
Who can invest in SGB?
Any resident under Foreign Exchange Management Act (FEMA) can invest in SGB. Hence any individual, Hindu Undivided Family, trust and universities can invest in SGB. Investment can also be done by a guardian on behalf of a minor. You need to provide KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport for buying the SGB. NRI can hold the bonds only as a nominee of a resident investor, he cannot invest in the bonds through purchase of subscription.
SGB will be made available in banks, Stock Holding Corporation, post offices and recognised stock exchanges.
The application for SGB has to be made in the minimum lot of 1 gram and in multiples of 1 gram maximum up to the permissible limits. Individuals/HUF can invest up to 4 Kgs in every financial year. Other eligible entities has an option invest up to 20 Kgs in a year.
Tenure of SGB
The SGB tenure is for a period of 8 years but the investors have an option to opt for early redemption after completion of 5 years on the interest payment dates. You have the option to keep the bonds in physical form or in demat form at the time of application. At a later stage, you can also get the physical certificates converted into demat.
Taxation of interest and the profit on redemption of the bonds
SGB interest received at 2.5% per annum is fully taxable in the hands of the investors. The profit made on redemption of the bonds will be exempt from capital gains tax. In order to enjoy the exemption, you need to wait until redemption. If you sell the bonds before redemption, it ends being taxable, but you will be entitled to avail the indexation benefit while computing Capital gains
6) Gold Funds
Here, you invest in bullions and stocks of companies operating in gold mining and gold-related activities. A MF manager company manages the gold fund, unlike gold ETFs, on behalf of the Asset management company. Using Fundamental trading analysis, the Fund managers trade in stocks to maximise the returns for the investors. GF returns depend on market conditions to some extent, though not directly affected by the change in gold market prices.
You can purchase Gold though SIP’s which is not available under Gold ETF’s. Since the investments are diversified over a wide range of options. Gold MF eliminate the risk of returns considerably. Since you don’t put all eggs in one basket, you work on the principle of diversification.
7) Digital gold
Under Digital gold, you purchase gold and jewellery online. Paytm provides Digital Gold on the mobile wallet platform. Stock Holding Corporation of India offers Gold Rush in their web page and ME Gold has been launched by Motilal Oswal. The Gold is bought in physical form and is stored centrally. You can redeem the same either as physical gold or you can sell it back to the vendor.
Making a choice
The preliminary cost of owning physical gold is around 10 percent and it is even higher for jewellery. With respect to SGB there is no entry cost, in Gold ETF, it could be around 1 percent.
If you are ready to invest in gold long term, go for SGB where maturity is after 8 years, although the lock in ends from the 5th year. Comparing gold ETF with SGB, the former provides much better liquidity. Both in case of SGB and ETF, you don’t have the risk of owning and holding the asset physically.
Speaking from the taxation point of view, as already discussed Capital Gains in SGB on redemption are tax-exempt but gains in case of Gold ETFs after 3 years are subject to 20 percent tax post indexation as they take the nature of Long Term. In Gold ETF’s, the units will not earn the additional interest of 2.5 percent.
Before deciding upon gold investment, you first need to get a clear idea on why you need to invest in the first place – whether it is for marriage or pure investment. If investment is the option, you should not have more than 10% of the overall portfolio in gold. You can decide between ETF and SGB depending upon how comfortable you are in managing the investments online and keep aside the worry of purity, safety, theft etc.
WHY IT IS NOT A GOOD TIME TO INVEST IN GOLD TODAY?
Gold is your ultimate safety haven. We have already seen why we need to invest in gold and how gold tends to do well when there is steep inflation and the US dollar is under pressure. So that risk free safety element always should be there in your overall portfolio. The most important point to be noted is that it should have already been there in your bucket, this is not the time to add more. Gold prices have gone up by 43% in India when compared to the last year’s Akshaya Tritiya. Prices in the last year April was around 3200/3300/ gram by now its around 4600 levels. So if you have already invested, purchased and diversified in gold by now, you would have enhanced your wealth by 43% year on year.
In my opinion, this is not the time to increase it as the gold prices are on the rise. Every analyst is projecting a very fluid market, unclear economy and predicting the bad news.So gold has already enjoyed the benefit by now. If you decide to invest in gold right now, its like buying equity at the highest PE rates
CONCLUSION
When it comes to Gold – it won’t do anything between now and then except be there and stare at you. Whereas, Infosys will be making money, and I think Reliance Industries will be making a lot of money, and there will be a lot – and it’s a lot – Don’t you think its better to have a goose that keeps laying eggs than a goose that just sits there?
When you invest in shares/MF, you become a part of the company and dividends accrue to you. If you invest in FD, you will be earning interest on the same. If its real estate, you earn in the form of rent. But with gold, you have no return/benefits. It just lies there..
Covid Crisis is not something that will happen too often and that does not mean that one should invest in gold beyond limits. In the long term, we want the money to work for us, and with gold that will not happen.
If you are someone with a stable and regular income, you should not put more than 2-5 percent in precious metal. If you do not have a stable income, cap it to 10%. Have a small portion of your portfolio in gold for the sale of diversification. Fill your portfolio with good quality equity MF SIP and fixed income products instead. You will enjoy the benefit of compounding and in some cases, they provide better post tax returns as well.
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