Like no other commodity, Gold has held the fascination of human society since the beginning of the common era. Empires and kingdoms were built and destroyed over Gold, but since as humans developed, Gold was accepted as a satisfactory form of payment. In short, history has glorified Gold than any other commodity on the planet, and that glorification has never disappeared. From a fundamental perspective, Gold is viewed as a favorable hedge against inflation – Gold functions as a good store value against a declining functional currency.
Investors have embraced Gold in 2020 as a key and essential portfolio hedging strategy. Gold had a remarkable performance in the first half of 2020. Though equity markets around the world rebounded sharply from their Q1 lows, the high level of uncertainty surrounding the Covid-19 pandemic and the ultra-low interest rate environment supported strong financial flight-to-quality lows. Like money market and high – quality bond funds, Gold benefited from investors’ need to reduce risk, with the recognition of Gold as a hedge.
Let us have a generic overview of the common ways to invest in Gold.
| Parameters | Physical Gold | Gold ETF’s | Gold Mutual Funds | Sovereign Gold |
|
What is it? |
These are investments in the form of physical Gold such as jewellery, Gold coins, Gold bars, etc | The investor buys a proportionate of the value of Gold but not in physical form. Such investment happens on Stock Exchange (NSE or BSE) with Gold as an underlying asset | Also called Fund of Funds (FOF) because they majorly invest in ETFs. Though they can also invest in physical Gold and Gold mining companies but the major part of portfolio is seen invested in Gold ETFs | SGB is another way of investing in paper Gold. They are issued by the RBI on behalf of GOI |
| Impurity Risk | Yes | No | No | No |
| Interest Income | No | No | No | Yes – currently 2.50%
|
|
Demat Account Needed? |
No | Yes | Optional – Physical mode available | Optional – Physical mode available |
| Safety Risk
|
Yes | No | No | No |
| Default Risk | No | Negligible | Negligible | No |
| Minimum Investment | NA | 1 gram.
(0.5 gram also available by one or two companies) |
Rs. 1,000 | 1 gram |
| Maximum Investment | No such limit | No such limit | No such limit | Individuals & HUFs – 4 kgs
Trusts & similar entities – 20 kgs |
|
Additional Charges |
GST | Asset management and brokerage fees | Very marginally higher than that of Gold ETFs | None |
|
Can NRIs Invest? |
Yes | Yes | Yes | No |
|
SIP option |
No | No | Yes | No |
| Conversion into Physical Gold | NA | Vary from company to company | No | No |
| Use as collateral for loans | Yes | Yes | Yes | Yes |
|
Liquidity |
Less Liquid – loses its substantial value in conversion (especially jewellery) | Can be bought and sold like stocks, at market price, during the trading hours. This makes Gold ETFs most liquid out of the lot | Highly liquid – redemption takes T+3 working days.
Exit load of 1% applicable if redeemed within 365 days of investment |
Maturity – 8 years
Redemption – 5th year onwards on interest payment dates (semi-annually). It can also be traded in the secondary market prior to its lock-in period of 5 years |
|
Taxability
|
|
1. Same as physical Gold up to 8 years when traded in the secondary market or redeemed before maturity.
2. Capital gains – tax-exempt on maturity (at the end of 8 years) 3. No TDS applies to interest |
||
Conclusion:
Some show their absolute favoritism for physical Gold but for Indians, holding physical Gold has been a charismatic affair and the deciding factor is more than just math and finance.
All three instruments: Gold ETF, Gold MF and SGB are the top three ways of investing in paper Gold. However, with our maths done, we conclude Sovereign Gold Bond (SGB) as the most lucrative instrument for investing in Gold. Its exceptional features like interest payout besides capital appreciation and tax-free status on maturity are cherry on the top. We do not see a Gold instrument with lesser traits of risks like impurity, safety and default.
Next series of SGB (Sovereign Gold Bond 2020-21 – Series VI) opens on Monday, August 31st, 2020 and closes on Friday, September 4th, 2020. Find the details mentioned below:
| Issue | Sovereign Gold Bond 2020-21 Series VI |
| Issue Opening Date | Monday, August 31st, 2020 |
| Issue Closing Date | Friday, September 4th, 2020 |
| Issue Price for Online Mode | Price will be shared Shortly |
| Issue Price for Other Mode | Price will be shared Shortly |
| Bidding Session Time | 9.00 A.M. to 3.00 P.M |
| Minimum Bid Quantity | 1 (gram) |
| Maximum Bid Quantity (for Individual & HUF) | 4,000 Gram |
| Maximum Bid Quantity (for Trust and similar entities notified by Govt.) |
20,000 Gram |
| Issuance mode of the instrument | Demat / Physical mode |
| Interest on application | Not applicable |
|
Who can apply? |
Resident Individuals, HUFs, Trusts, Universities and Charitable Institutions |
To know more about Gold pricing mechanism, read our previous article https://ontrustcap.com/investing-in-Gold-look-before-you-leap/