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RJ Market Watch

It’s time to look beyond physical gold!

Retail Jeweller India



Gold ETFs or funds make it easy for investors to buy gold at low cost, without having to hold physical gold and without incurring wastage associated with physical gold.

Indians’ love for gold is quite well-known and irrespective of its price and availability of other instruments, physical gold (Jewellery, coins and bars) still remains the preferred choice. For people, investing in gold is part of social security and they cherish possessing gold.

In 2015, the Indian government introduced Sovereign Gold Bond (SGB) scheme. SGBs are government-backed securities issued by the Reserve Bank of India. With growing awareness, instead of buying gold physically in the form of jewellery or coins, investors are also considering SGBs, and Gold Exchange Traded Funds (ETFs), among others.

“Indians are known for their huge appetite for gold. So to reduce the demand for physical gold, the government created a new way to invest in gold via SGBs. This gave a push to the government’s agenda to shift a part of the domestic savings (that was used for the purchase of physical gold) towards financial savings,” says Dev Ashish, Founder of StableInvestor.

The SGBs are opened for fresh purchases in periodic tranches and the subscription price of the bond is based on the average closing price of gold (of 999 purity) of the last 3 business days of the week preceding the subscription period. A discount of ₹50 per gram is given to investors applying online. The minimum investment that can be made is 1 gram while the maximum limit for an individual is 4 kilograms, explains investment advisor Ashish.

The tenure of the bonds is 8 years. However, there is an exit option after the fifth year and this option can be exercised on the interest payment dates. So if an investor wants, they can take the exit option on the interest payment dates of the sixth and seventh year too. But no redemption are allowed before the fifth year. There is also an option to exit the bonds even before the fifth year, but that is to be done via stock exchanges. So if one wants to exit before the fifth year, then the gold bonds can be sold in the secondary market.

“The most unique aspect of gold bonds is that they pay a fixed interest rate of 2.50% per annum (which is payable semi-annually) on the original investment value. No other mode of gold investment offers this additional stream of income,” adds Dev Ashish.

Gold, a wonderful asset class

Professor Malarvizhi Manikandan says that right from her childhood she has seen her mother keeping a certain part of her savings in gold in the form of jewellery and coins. “Considering making charges and GST, I have started investing in gold ETFs. But still, like many middle-class Indians, a part of my savings also goes into purchasing gold jewellery,” she says.

Association of Mutual Funds in India (AMFI) explains various advantages of Buying gold ETFs including its tax-efficient way to hold gold as the income earned from them is treated as long-term capital gain. ETFs are accepted as collateral for loans.

“Gold, on its own, has no inherent investment return. It derives its returns from stress in other asset classes – namely equity and debt. And equity gets into a risk-off mode when there are crises at hand, such as the global financial meltdown and now the Covid-19 pandemic. And at such times gold rally can be very profitable. Global crises- oil price shocks, runaway inflation, geopolitical tensions (the Gulf War) or financial market turmoil (global financial crisis),” says Vidya Bala, co-founder of Primeinvestor.in.

Gold can be portfolio insurance from soaring equity markets and rupee depreciation. Apart from protecting your portfolio during market meltdown, gold delivers positive returns from Rupee depreciation too. This is because an FII exit in India can cause sharp rupee depreciation. At such times, gold can directly add to your returns. In other words, it acts as a good asset diversifier in your portfolio, she adds.

“Gold is more of a diversifier in the overall portfolio and a kind of hedge. It shouldn’t be the core of the portfolio unless you are a professional short-term multi-asset trader who knows what he is getting into. Gold returns can be very lumpy. It’s best to spread your investments in gold. And since both gold SGBs and gold ETFs have their advantages and disadvantages, it makes sense to gradually use both for your long-term investments,” says Ashish.

Investors can hold a combination of SGBs and gold ETFs. “You can purchase SGBs occasionally when new series are announced and you have funds available to invest. This can be augmented by purchasing gold ETFs when there are temporary short-term price corrections in gold. Or if you want to accumulate gold regularly, then do a SIP in Gold ETFs every month,” adds Ashish.

Don’t invest randomly

Though non-physical gold bonds are a good way to invest in gold for the long term, one should not invest in gold bonds or any other form of gold investment (ETF, funds, etc.) randomly. These should always be a part of a well-thought-out overall asset allocation strategy for the long-term portfolio. The Gold Bonds are best suited for those who have a longer investment horizon, as these gold bonds come with a long tenure, i.e. 8 years, and also because the gains are tax-free if held till maturity, says investment advisor Ashish, adding, having some exposure to gold (ranging from 5-15%) in the long-term portfolio is advisable.

Gold Funds

These are simply mutual funds that invest primarily in gold ETFs. So it’s a way of taking exposure to gold ETFs without buying them directly or via a demat account. But it carries an extra layer of costs towards management fees (within the AMC’s MF structure) that reduces returns a bit when compared to gold ETFs. Gold MFs are open-ended investments and ideal for investors who want to lower the risk of investment. Also, it can be liquidated easily.

Gold ETFs or funds make it easy for investors to buy gold at low cost, without having to hold physical gold and without incurring wastage associated with physical gold. They are well regulated (unlike digital gold) and are also convenient to do small investments – through SIPs, says Vidya Bala.

Gold bonds or ETFs?

Investment advisor Dev Ashish lists out a few pointers to pick between Gold bonds and ETFs:

  • If you are planning to use gold as a tactical part of the portfolio that you will regularly buy and sell, then you need to value liquidity more. And hence, investing in gold ETF is better than SGBs.
  • If you plan to hold a large corpus in gold for the short-term, then having it in SGB will mean that you will need large volumes on exchanges to exit your positions. But that is not feasible currently due to poor volumes of various SGB series of stock exchanges.
  • But if you are investing for the long term and are sure that you won’t need to exit before 8 years or so, then SGB may be a better option.

Or a combination of SGBs and ETFs can be taken to gradually build up an allocation to gold in your long-term portfolio. This will provide a good balance of liquidity (via ETFs) and higher returns (via SGBs).

Key takeaways

1)Physical gold has been a preferred investment instrument among Indians, but it is slowly changing now. Investors are also looking at other options- SGBs and Gold ETFs.

2) SGBs are a low-risk investment and pay a fixed interest rate of 2.50% per annum

3)One of the advantages of gold ETFs is the transparency in pricing. Investors can use both SGBs and Gold ETFs for long-term investments.


Courtesy: Hindustan Times

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