Save Smart. Safest options to invest in gold

Gold can play many roles in an investor’s portfolio — from return-diversifier and a hedge against inflation to an insurance against adversities. But for Indian investors, what’s the best way to invest in gold?

While buying gold digitally through mobile wallets could be a way out, remember, such products operate in a regulatory vacuum.

There is no watchdog akin to SEBI for capital market entities to oversee digital platforms that sell gold.

Thus, we leave this option out and discuss three well-regulated options.

Sovereign gold bonds

Sovereign gold bonds (SGBs) are issued by the Reserve Bank of India (in denominations of 1 gram or more) and represent borrowings by the Centre.

Their main attraction is that they carry a sovereign guarantee with a coupon of 2.5 per cent per annum on the face value of the bond. This is on top of the maturity value of the bond, pegged to gold prices, which delivers capital appreciation linked to domestic gold returns.

Interested investors can buy the tranche of SGBs opening on November 9. If these bonds are held till maturity (when they will be redeemed at the prevailing market price of gold), which is set at eight years, the gains for individual investors are exempted from capital gains tax.

Pre-mature exit is allowed after five years when the RBI buys back these bonds.

However, note that if you sell these bonds in the secondary market and not to the RBI, you will need to cough up tax on capital gains at 20 per cent (with indexation benefit).

In case of premature redemption, investors can approach the concerned bank/broker 30 days before the coupon payment date.

Note that the investor can sell SGBs in the secondary market even before completion of five years, but then she/he will have to bear capital gains tax (at slab rate if held for 36 months or less, and at 20 per cent with indexation benefit if held for more than 36 months – this is akin to physical gold).

The only hitch in case of SGBs is that buying and selling in the secondary market is not that easy. Unless the investor and the broker have a depository account with the same DP (Depository Participant), transfer of SGBs can be tough. This is because SGBs are treated as government securities where inter-depository transfer is not allowed.

Though the RBI has permitted inter-depository transfer in SGBs, depositories have not yet fully sorted out the technical issues related to it.

While SGBs score on returns and friendly taxation for retail investors, the key negative is the lack of flexibility on your entry and exit.

Given that secondary market trading in these bonds is limited, you may have to buy these bonds when new offers open and sell them when the RBI opens its buyback window.

Gold ETFs

Gold exchange-traded funds (ETFs) of mutual fund houses have been seeing record inflows this year. While these deliver slightly lower returns than SGBs, they are also a paperless, friendly option for long-term investors looking to invest in gold.

SEBI ensures that the investor money is safe in gold ETFs through many checks and balances.

For every unit of ETF issued, there is an equivalent value of physical gold bought by the asset management company (AMC) that is verified and held by a SEBI-registered custodian.

The custodian is responsible for safekeeping the gold.

The gold belonging to a gold ETF is stored with an independent vault-provider who maintains records on a daily basis, identifying the bar number with purity certificate and tracking daily gold movements.

Note that unlike issuers of digital gold (mobile wallets), MFs issuing gold ETFs are required to give monthly disclosures on their gold holdings to SEBI; the holding is also audited internally as well as externally.

A sore point about gold ETFs is that their cost is higher than SGBs’ as MFs levy fund management fees. Not all gold ETFs are actively traded in the secondary market and this can lead to difficulty in building or liquidating large positions, as well as to prices moving away from the underlying NAVs (net asset values).

Investors, therefore, need to pick gold ETFs with healthy trading volumes that are quoted close to their NAVs.

Unlike SGBs, capital gains on gold ETFs are taxed similar to that on physical gold.

Gold futures

MCX, India’s largest commodity bourse, offers an option to invest in gold from a denomination of 1 gram.

The commodity futures market is regulated by SEBI.

Called ‘Gold Petal’, the 1 gram gold contract of MCX is a hit among retail investors.

Shivanshu Mehta, Head - Bullion at MCX, says the product’s appeal is thanks to the innovative design which enables electronic accumulation in as little as 1 gram units, till the point the investor needs actual delivery.

The liquid order book that facilitates easy SIPs (systematic investment plans) is also a reason for the contract attracting retail investors.

While the average daily turnover in Gold Petal contract (launched in October 2019) in 2019-20 was ₹10,163 crore, this financial year, so far, it has been higher at ₹54,415 crore.

One attraction of gold futures over other forms of investment is that the investor need not pay the full amount of the value of gold right away. The investor can pay just the margin (6 per cent of contract value) and take exposure to the full contract value. However, you need to settle the full value at the time of expiry of the contract if you intend to take delivery or accumulate gold.

However, depending on the volatility in the contract price, the investor may be charged additional margins by the exchange. Trading income from commodities is clubbed with business income and taxed at your slab rate.

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