However, with the investors spoilt for choices among five different forms of investment options in the precious metal—physical gold, digital gold, Gold ETF, gold mutual funds and Sovereign Gold Bonds—that obvious question that arises is, what is the best one.
To make things easier, consider these factors before putting your money: the risk involved, return on investment, liquidity and taxation.
Like any other investment, putting money in gold has its own risk. For example, physical gold carries the risk of theft, quality issues, loss during jewellery making etc. On the other hand, digital gold does not come under the purview of Reserve Bank of India, SEBI or any other regulatory body; hence lacks a regulatory oversight.
Both the Gold ETF and mutual funds carry a market risk due to volatility of gold prices. Meanwhile, the Sovereign Gold Bond runs the risk of sovereign default, simply because it does not have physical gold as an underlying asset; it is rather a derivative product, guaranteed by the Indian government.
Investment versus return
Returns from gold investment may vary slightly depending on investment option.
For Sovereign Gold Bonds, you can get an assured return of 2.5% per annum, says personal finance expert and Youtuber Paritosh Sharma. “On the other hand, the GOLD ETF, which tracks the domestic gold prices, is also a good option.”
As far as physical gold is concerned, Sharma says, there is no uniformity in returns as it is often priced differently in different state. “Plus, extra charges reduce your profit.” Hence, there are no assured returns.
Liquidity for different asset classes
Gold itself is considered a highly liquid asset class: physical gold, digital gold, ETF and mutual funds can be easily bought and sold in the market. However, Sovereign Gold Bond comes with the maturity tenure of eight years, even as it is not compulsory to hold it for the entire period.
These bonds can be encashed prematurely after completion of a five-year lock-in period. Alternatively, they can also be sold at the secondary market, albeit, at a lower price.
How gold is taxed?
Like debt funds, capital gains taxation rules are applicable for gold. So, if you sell the gold investment within three years, Short Term Capital Gains (STCG) will be applicable as per your income tax slab. If you sell it after three years, Long Term Capital Gains (LTCG) will be charged. That way, you would be charged at 20% with indexation.
The Sovereign Gold Bonds are, however, exempted from the LTCG taxation rules, if they are redeemed between five and eight years. But, the interest from Sovereign Gold Bonds is taxed as per the investor’s tax slab. This is because the income from the interest is categorised under ‘income from other sources’.
So what is the smart way to invest in gold?
Considering all the factors, Sharma says, “Sovereign Gold Bond is a good option if you are looking to invest for a long term, since it has long maturity tenure.”
Explaining his point further Shweta Jain, certified financial planner, founder, Investography, and author, My Conversations with Money notes, “For long-term investor, SGB is the right choice as one gets tax benefits to stay invested for eight years. The additional 2.5% interest above the gold prices and no charges make it quite attractive.”
But if your investment horizon is low, Sharma says, you should consider GOLD ETF. “It not only protects one’s wealth from inflation but it’s highly liquid and transparent.”
Adding to his view, Shweta says in fact, Gold ETF is a good option even for the longer-term investor.
Both the experts, however, recommend against investing in physical or digital gold.
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