How to choose from physical gold, digital gold, gold ETF or Sovereign Gold Bonds this Akshay Tritiya | Photo Credit: IANS
Akshay Tritiya also known as Akha Teej or Akti is celebrated by Hindus as an annual spring festival in India and Nepal. The festival is considered auspicious for new ventures, marriages and purchasing gold.
Given that a majority of Indian states are in lockdown owing to the Covid-19 pandemic, buying gold physically is less of an option. Even if it were an option, it may not be the wisest, if the purpose of buying gold is purely from an investment standpoint.
In a nutshell, the biggest problem with physical gold such as gold bullion, coin or bars occurs at the time of selling it. Because banks do not buy back physical golds once sold to the customer, it is only accredited re-sellers/re-cycler, jewellers, retail websites or cash-for-gold websites. Most will measure the purity of gold, calculate the weightage and then give you the amount based on the day’s gold price. This is bound to cause spillage as you as the seller will have little control over the fair nature of the price offered to you for your investment.
Even if you’re willing to lose a few bucks to the aforementioned factors, there is always the question of storage. Whether you are willing to store your gold in the locker of your wardrobe or a bank vault, there is always the risk of losing your prized possessions to factors beyond your control. This problem is eliminated by digital gold or paper gold.
Buying digital gold is as easy as topping up your talk-time on pre-paid cell phone connection. It can be bought online from umpteen sources and is stored in insured vaults by the seller on behalf of the customer. You can invest in it via mobile e-wallets such as Paytm, Google Pay and PhonePe. Brokers such as HDFC Securities and Motilal Oswal also have an option for digital gold investing. However, lack of regulation, GST cost, holding charges, delivery and making charges, limit on investment horizon diminish the allure of digital gold. You can read all about it here.
Sovereign Gold bonds Vs Gold ETFs
When it comes to buying gold for investment purpose, financial planners agree that paper gold and paper-less gold (Gold ETFs and Sovereign Gold Bonds) trumps all other modes of investment.
Gold Exchange Traded Funds (ETFs) are open-ended exchange-traded funds that invest in 99.5% purity gold. Fund managers track prices who trade gold ETF units in the stock exchange. You will need a demat account to buy units of gold ETFs.
Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India (RBI) on behalf of the government. These gold bonds are denominated in multiples of 1 gram(s) of gold and are sold to resident individuals, HUFs, Trusts, Universities and Charitable Institutions. The maturity period of these gold bonds will be 8 years with an option to exit after the fifth year to be exercised on the next interest payment dates.
However, these are different from Sovereign Gold Bonds (SGBs) which fare better for a longer investment horizon. Gold ETF are comparatively more liquid than SGBs as the former can be sold in the secondary market to cash out the investment. However, SGB investors have to wait for a minimum of five years of lock-in. But for a longer investment period, SGBs are better as they have a maturity period of 8 years.
SGB investors who hold these bonds till maturity get exemption from capital gains tax. However, gains from the sale of Gold ETF proceeds are subject to capital gains tax at the time of sale.
SGBs provide partial withdrawal option after the 5th, 6th and 7th year. Investors can sell them in the secondary market and exit the investment. However, if SGBs are sold after three years but before the maturity then long-term capital gains tax of 20% will be applicable. No capital gains tax will be levied if you hold it till maturity. Perhaps the biggest advantage of SGBs is a fixed internet rate of 2.5 per cent per annum payable semi-annually on the nominal value. Gold ETFs have no such added advantage.
Gold ETF investors have to pay fund management charges and brokerage at the time of entry and exit from the investment. There are no such charges on SGBs.
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