In India, spot gold prices soared above 50,710 rupees per 10 grams mark this week. Today it jumped to Rs 50,749 per 10 grams. Gold has so far lived up to its reputation as a safe haven in 2020. Due to the recent accumulation in the price of gold, the yellow metal has yielded 28% so far this year. On Wednesday, the price of yellow metal had reached an all-time high in both domestic and international markets.
As uncertainty lingers around the global economic recovery, the number of coronavirus infections has increased at a faster rate, that contributing to the rise of the yellow metal. Besides this, near-zero interest rates around the world are also working hard for safe-haven assets.
Analysts said that precious metals may continue gains in price until the spread of the Covid-19 pandemic is controlled and there are any obvious signs of economic recovery emerges. In this case, the financial planner recommends using gold as part of your investment portfolio. However, you should not overuse this asset. Experts suggest that a 10-15% allocation of yellow metal is sufficient to achieve long-term diversification of the investment portfolio.
However, buying yellow metal for investment purposes is different from buying yellow metal (gold) jewelry for your own consumption.
Buying gold jewelry is not an ideal way to invest in gold. It is worth mentioning here that the inherently unrecoverable fees and taxes account for 25% of the total value of gold jewelry, which makes it an unattractive investment proposition. Some smart options for investing in gold are Sovereign Bond, Gold ETFs, and E-Gold.
Smart Ways to Invest in Yellow Metal
Financial planners recommend that investment in gold should be in the form of paper gold. Because, unlike physical gold, you will not actually own the gold, but instead hold it as an investment that can be redeemed when needed.
Investors are always on the lookout for the best ways to maximize their returns and paper gold happens to be a great investment option not only in terms of high yields but also in terms of high liquidity and price steadiness. If you are an investor and planning to invest in paper gold, then you have two choices either to invest in Sovereign gold bonds (SGB), E-gold, or Gold ETFs.
SOVEREIGN GOLD BONDS
The government launched a sovereign gold bond scheme in 2015 for those who want to invest in precious metals. Rather than owning a physical form of gold and leaving it idle without making any money, SGB provides the opportunity to own gold and earn interest.
Investment: At least 1 gram of gold can be invested. For individuals, the maximum annual subscription limit is 4 kg. The annual cap will include bonds purchased by the government at different levels during the initial issuance and those bonds purchased from the secondary market.
When you make an investment, an investor ID is issued, which tracks the total investment made. You will also get a certificate of holding SGB. Bonds are also eligible to be converted into Demat form. Only bonds kept in the Demat form can be traded on the stock exchange.
Maturity period and interest rate: The bond has a maturity of eight years, along with withdrawal options that can be used on the fifth, sixth, and seventh years of the interest payment date. The government has set the annual interest rate for investment at 2.50%, without compounding of the interest. The interest will be paid every six months, and the last time should be paid together with the principal when it is due.
Taxation: SGB’s taxation is beneficial to investors because the maturity income is tax-free, which is different from physical gold, which is subject to tax. The budget passed the redemption of bonds by individuals who were exempt from capital gains tax. Therefore, holding on till maturity comes with tax benefits. Do keep in mind that redemption through the stock exchange may result in capital gains or losses, so you may need to pay taxes accordingly after indexing (if applicable). However, according to your income tax slab, the interest on the bonds is to be fully taxed.
Liquidity: Compared with investments in SGB, investments in gold ETFs are more liquid. The redemption of units is completely online, and there is no lock-up period for gold ETFs.
Gold Exchange Trade Funds (ETF)
Another way to own paper gold in a more cost-effectively way is through a gold ETF. This type of investment (trading) takes place on a stock exchange (NSE or BSE) with gold as the underlying asset.
Pricing: The high initial buying and selling costs of owning gold jewelry, gold coins, or bars even give more advantages to low-cost gold ETFs. Transparent pricing is another advantage. The purchase price of it may be the closest to the actual gold price, so the benchmark is the physical price of gold.
Investment: What all you need is a trading account with a stockbroker and a Demat account. One person can buy it at once( in lump sums) or even at regular intervals. You can invest as little as 1 gram of gold. It is recommended to you invest systematically instead of trying to time the market.
GOLD ETF is listed on NSE
- Axis Gold ETF
- Birla Solar Life Gold
- IDBI Gold Exchange Traded Fund
- SBI Gold Exchange Trading Plan
- Motilal Oswal MOSt Equity Gold ETF
- Kodak Gold Exchange Traded Fund
- Quantum Gold Fund (ETF)
- Japan India Gold Exchange Traded Fund
- Invesco Gold Exchange Traded Fund
- Goldman Sachs Gold Exchange Trading Plan
- UTI GOLD Exchange Traded Fund
- HDFC Gold Exchange Traded Fund
- ICICI Prudential Gold Exchange Traded Fund
In recent years, the popularity of gold ETFs (Exchange Traded Funds) among investors has risen rapidly. Investors are more inclined to invest in gold ETFs because they track gold prices and eliminate storage requirements. However, in terms of investment, investors are often confused about choosing the best gold ETF.
The ideal choice for a gold ETF is to focus on funds with the lowest tracking error. It is recommended to choose a gold ETF with the largest margin and the largest trading volume. For the convenience of investors, we have listed the best gold ETFs to invest in India.
- Aditya Birla Sun Life Gold Fund
- Invesco India Gold Fund
- SBI Gold Fund
- Nippon India Gold Savings Fund
- Axis Gold Fund
- HDFC Gold Fund
How to choose the best gold ETF?
The parameters for choosing the best gold ETF in India are
- Fund performance record is important to understand the past performance of the fund business in exchange-traded funds. When investors are looking for the best gold ETF, it is recommended to choose a fund with a record of at least three-four years.
- Need to check the liquidity of exchange- ETFs need to be checked based on trading activities. Most ETFs trade gradually based on fluctuations in their benchmarks, but some ETFs trade scarcely. Trading activities confirm the liquidity of ETFs. The higher the trading activity, the higher the liquidity.
- Tracking Error-The Exchange Trade Funds are expected to closely track the underlying index, but certain ETFs do not closely track it. Investors should choose an ETF with the most miniature tracking error.
Cost: Even if there is no entrance fee or exit fee, you should take into consideration these three costs. First, the expense ratio (used to manage the fund) is roughly 1%. Second, there are broker fees that you need to consider every time you sell and buy gold ETF units. Third, technically speaking, it is not an expense, but it is a tracking error that affects revenue. It is due to funding expenditures and cash holdings, so it does not reflect the actual or real gold price.
Taxation: Although there is no risk of holding and owning in both, there are big differences in taxation. Profit on SGB after redemption is tax-free, but gold ETF profit after 3 years is subject to a 20% after-tax indexation.
Liquidity: However, gold ETFs are more liquid. Moreover, since the ETF unit is completely completed online, it is much easier to own an ETF unit than an SGB.
What is E-Gold?
E-gold means electronic gold, which is another form of investment in gold, in which there is no physical gold transaction. In 2010, the National Spot Exchange (NSE) launched electronic gold in India to benefit investors who wish to invest in the yellow metal. The biggest advantage of e-gold is that it allows investors to invest in gold at a much lower denomination than physical gold.
The basis for investing in gold electronically is:
- Electronic gold is the process of buying gold electronically. To invest here, you should open a trading account at the designated NSEL dealer. Electronic gold units can be bought and sold through the exchange (NSE) like stocks.
- On NSE, one unit of electronic gold is equal to 1 gram of gold.
- Investors who wish to invest in the yellow metal as part of their long-term financial goals can purchase electronic gold in small quantities and keep it in a Demat account.
- Once the goal is reached, they can actually take physical delivery of the gold through the exchange. Those who don’t want physical delivery can sell electronic products and cash it out at any time.
- By purchasing gold electronically, people do not have to worry about the purity of the gold and its safe preservation.
E-Gold Advantage: Yellow metal rates on NSE is based on the Indian market value. Investors can purchase and trade gold in small denominations. For example:1 gram, 2 grams of gold. The transparency of pricing and seamless transactions is one of the main advantages of this product. The product has high liquidity. One can sell it at any time. No risk of impurities.
SGB is issued regularly by the government at the current gold price. It has a fixed life of eight years, but it can be sold after being locked for five years. However, if you hold SGB bonds till maturity, you do not need to pay any capital gains tax on the amount you invest. For gold ETFs or gold funds, capital gains obtained after three years of investment which are taxed at a rate of 20% after indexation.
In a gold ETF, the appreciation/devaluation of the gold price is your only income, but for SGB, you will receive 2.5% interest every year, which will be paid every six months. Furthermore, this interest income is subject to income tax.
Another benefit of SGB over Gold ETF is that yellow metal funds charge a 0.5-1% tax on fund management fees each year, but for SGB, no such fees are charged. According to experts, if you intend to hold bonds to maturity, SGB is still the best tool to participate in gold trading in the long run. One can also sell SGB on the secondary market. But due to the small quantity, you may not get the price you want.
Which one you should Prefer to Invest in Yellow Metal?
SGB is beneficial to those who wish to invest in gold for a long time, as it has a maturity period of eight years (the lock-up period starts from the fifth year). The disadvantage of gold exchange-traded funds is that their ETF funds will not earn 2.5% extra interest every year. When evaluating these two investment options, do keep tax and liquidity factors in mind.
When choosing between the two, keep all the pros and cons of these two investment methods. Choose products based on how comfortable you are with online investment management and keep set aside concerns about purity and safety.
However, before making an investment decision, do find out and determine the reason you want to invest-whether it is a wedding or creating wealth. Besides this, you must ensure that your total yellow metal investment does not exceed 10% of the total investment portfolio, whether it is physical gold or paper gold.
This year, the center has so far launched three batches of SGB. It will be carried out in three batches within eight months.
Experts say that for those who want to invest in gold regularly in the form of a System Investment Plan (SIP), gold ETFs are their best choice. Unlike SGB, they can be used at any time.