Should you invest in physical gold, gold ETFs or Sovereign gold bond this Dhanteras?
Gold demand would see a surge during this time as people across the country consider buying yellow metal to be auspicious, especially during Dhanteras.
The festival of lights is just around the corner. Gold demand would see a surge during this time as people across the country consider buying yellow metal to be auspicious, especially during Dhanteras. However, physical gold alternatives like Gold Exchange Traded Fund (ETF) and Sovereign Gold Bond (SGBs) have gained popularity because of their unique features.
If you are looking to invest money in gold this Dhanteras, then you must understand its benefits in terms of liquidity, safety, tax efficiency and ease of investments.
Let us check out each aspect one by one and find out how you should invest in gold this festive season.
Liquidity AspectInvesting in physical gold means high liquidity. This is an investment that you can exit anytime at the prevailing gold buying rate, however, it is important to note that buying and selling price of gold varies significantly. Suppose the selling price (the price at which bullion merchant sells the gold) is Rs 30K/10 gm, then buying rate (the price at with bullion merchant buys the gold) could be as low as Rs 28K/10 gm. So, if you buy and sell gold in a short duration, then you may lose lots of money due to difference in buying and selling rate.
Gold ETF is also very liquid and trades on the stock exchange. You can sell it during a trading session at the real-time rate and the cost of selling is very low in comparison to the physical gold. You just need to pay the brokerage (including government duty) when you sell the ETF. There is a very thin difference between the buying and selling rates of gold ETF on the stock trading platform.
You can buy SGB through the authorised banks and NBFCs as well as through the stock exchange trading platform. The expense of buying or selling the SGB is very small in comparison to the physical gold. SGB can be bought or sold similar to the ETFs, however the tax implication will be different.
Safety FactorInvestment in physical gold is highly susceptible to theft and burglary, however if you invest in an ETF or SGB then you can keep the investment safely. Physical gold requires careful handling and is unsafe when kept at home. ETF and SGB are kept in the dematerialised form and held in the DEMAT account, therefore it is very safe and easy to handle.
The author is CEO BankBazaarTax EfficiencyIf you hold physical gold, ETF or SGB for more than 3 years, then it is considered as a long-term holding and becomes eligible for long term capital gain (LTCG) at 20% with indexation. Selling before 3 years is considered as short-term capital gain (STCG) and gain is taxed as per applicable slab rate of the individual.
However, SGB allows one more advantage on the tax front. If you hold it till maturity and redeem it after it's maturity period, then the complete gain is tax exempt.Return BenefitThe rates of ETF and SGB are linked to the physical gold rates. So, the capital appreciation benefit of all the three investment products are same, however in addition to capital gain benefit, SGB also offers interest at 2.5% p.a. on the invested value to its investors. So, if you are investing for a very long period, then 2.5% p.a. interest can make a big difference to the overall return.
Loan FacilityLoan against gold is a very popular borrowing product. You can get the loan against your physical gold investment by pledging it with the bank. Similarly, loan facility is also allowed against SGB as well, however, such loan facility is not allowed against the ETF.Investment FlexibilityAt the time of investment, you can buy and accumulate as low as 1 gram of gold while buying SGB or Gold ETF. But, you may find it difficult to buy and maintain 1 gram physical gold. Facility of buying small quantity can multiply your investment benefit as you can gradually accumulate gold in your account and make a big portfolio and also get the advantage of Rupee cost averaging.
So, if you are looking to buy gold for a long-term investment, earn handsome returns and also want to get tax benefit on income from such investment, then it is time to look beyond physical gold investment and put your money in new age gold products such as SGB and Gold ETF.