Planning to buy gold this Dhanteras? Purchasing jewellery, coins and bars is passé. It not only involves additional outgo like making charges, wastage but also locker charges for safekeeping. Purity may not always be a given and the risk of theft remains. Break free from these hassles this year! There are several options to take exposure to gold electronically. Besides, investments in gold are an inflation hedge too and it will be prudent to allocate about 10 per cent of your investment portfolio to the yellow metal alongside asset classes such as debt and equity. Here’s all you need to know about Gold Exchange Traded Funds (ETFs), Gold Mutual Funds, Sovereign Gold Bonds (SGBs) and Digital Gold.
Sovereign Gold BondsWhat is it?
Sovereign Gold Bond (SGB) is a government security issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The bond is denominated in grams of gold. The RBI has been issuing these bonds under various series every fiscal since November 2015. The eighth, ninth and tenth series of the SGB for this fiscal will be open for subscription from November 29 to December 3, January 10 to January 14 and February 28 to March 4, respectively.
An interest rate of 2.5 per cent per annum on the initial subscription value is paid semi-annually.
Where to buy?
These bonds can be bought directly by filling up the requisite form available on the RBI’s website. Alternatively, investors can apply for the bond through Scheduled Commercial Banks, designated Post Offices, Stock Holding Corporation of India Ltd (SHCIL), Clearing Corporation of India Limited and the stock exchanges (National Stock Exchange and Bombay Stock Exchange) either directly or through their agents. All the older series of these bonds are available for purchase in the secondary market on the stock exchanges for those who want to buy them at any time outside the subscription period of the primary issue. A list of SGBs available in the secondary market can be found at https://www.nseindia.com/ market-data/sovereign- gold-bond
Permanent Account Number (PAN) is a mandatory detail that will have to be given at the time of applying for the SGB. In case you want to hold the bond in demat form, then you will have to furnish your Depository Participant ID and the Client ID in the application form.
The minimum purchase value is one gram of gold. Payments can be done by cheque, Demand Draft (DD) or through electronic transfer. Cash payments are also accepted but for a value up to ₹20,000 only. An individual is allowed to buy up to a maximum of 4 kilogram of gold in a fiscal year. This will include the bonds purchased at the initial issuance and those bought in the secondary market. The issue price is fixed by taking the simple average of gold price (closing for the purity grade 999) of the last three working days prior to the subscription period as published by the Indian Bullion and Jewellers Association (IBJA).
Since SGBs are kind of a derivative instrument of gold held in either paper or demat form, costs like making charge, storage, GST and other expenses that an individual will incur on other avenues like buying physical, digital gold, etc, are not applicable here.
The tenure of the SGB is eight years with a lock-in period of five years. After five years there is an option of exit/pre-redeem the bond in the fifth, sixth and seventh year. The RBI opens a special window for pre-redemption. Like the issue price, the redemption price is fixed as the average IBJA’s gold closing price of the last three working days prior to the redemption date.
However, if you want to exit before five years or anytime in between the total tenor of eight years, it can be done in the secondary market in the stock exchanges at the prices available at that time.
The interest payment received is completely taxed as per the individual’s tax slab.
If you redeem the bond at the end of eight years, the capital gains, if any, are not taxed. But if you exit the bond on the secondary market in between, then Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) tax will be applicable.
If you exit within three years, STCG is applicable. Here, the gains will be added to your income and taxed as per the applicable tax slab. Beyond three years, LTCG tax of 20 per cent will be levied on the gains. However, the indexation benefit is applicable in this case.
One, your return is not only the price appreciation, if any, but also your interest income. Secondly, if you subscribe for the primary bond issue entirely through the online mode, you will get a discount of ₹50 per gram on the issuance price.
As the bonds enjoy sovereign guarantee, there is no risk of default in case of SGBs. Secondly, since this is in the paper or demat form there is no risk of impurity as in the case of physical gold. However, there are two risks. One, the risk of gold price depreciating over the time frame for any issuance. Two is the liquidity risk associated with buying and selling SGBs in the secondary market. If you are opting for this route, it is best to go for bonds with consistently good trading volumes and that too in small quantities of up to, say, 10 units.
Gold Exchange Traded FundsWhat is it?
Gold Exchange Traded Fund (ETF) is an open-ended mutual fund whose underlying asset is gold.
Where to buy?
The ETFs are listed and traded on BSE/NSE.
A demat account is mandatory. So, you will have to comply with Know Your Customer (KYC) requirements like producing photo, address proof, Aadhaar, PAN and bank account details to open a demat account.
The minimum investment size is one unit as traded on the exchange. There is no maximum limit.
Since this instrument is traded on the stock exchange, costs like brokerage, exchange charges and taxes are applicable. Additionally, the expense ratio is in-built in the price. However, Securities Transaction Tax (STT) is not applicable.
One can sell on the exchanges and settle in cash.
On redemptions, STCG (holding period less than three years, taxed at slab rate) and LTCG ( more than three years, 20 per cent tax with indexation) are applicable.
Gold ETFs are safe and transparent instruments. For every unit you buy, the mutual fund house buys physical gold. All gold is stored with an independent vaulting agency where records are maintained. SEBI-registered custodians oversee the holding of equivalent physical gold and there are audit requirements for fund houses too. Besides, MFs issuing gold ETFs must make periodic disclosures on fund holdings to SEBI.
Liquidity is a risk . There are about thirteen Gold ETFs listed on the NSE and about eleven on BSE. But not all are actively traded. So, investors should be careful in selecting one with relatively higher liquidity so that exit becomes easy.
Amongst gold ETFs, investments can be considered in Nippon India ETF Gold BeES (NSE: GOLDBEES) and HDFC Gold ETF (NSE: HDFCMFGETF) on account of lower impact costs, cheaper expense ratio, higher trading volumes, and better-than-average tracking difference. For instance, Nippon India ETF Gold BeES has the lowest impact cost of 0.03% and its 2-year average daily traded quantity (43.56 lakh) is by far highest in category. Similarly, HDFC Gold ETF, with a cheaper expense ratio of 0.57% against category average (0.60%), has outperformed category in terms of tracking difference (ie. gold ETF return vs domestic gold price) over 5- and 10-year periods by 5-15 bps.
Keep in mind that there is a risk of capital loss as the gold price can move in either direction.
Gold FundsWhat is it?
Gold funds are a category of mutual funds that mainly invest in Gold ETFs; hence, basically, Fund-of-Funds.
Where to buy?
An investor can choose the direct route and buy gold funds from the fund house. This method has no additional charges. Alternatively, one can buy the fund from mutual fund distributors. But this route will incur the distributor’s commission as an additional charge, which is built into the expense ratio.
General Know Your Customer (KYC) process involving the submission of address and identity proof, PAN and Aadhaar along with the bank account details have to be furnished at the time of first investment.
If you are already investing in any mutual fund, then fresh KYC process is not needed. The details will be fetched from the Central KYC database.
While SIPs can be started for as low as ₹100, investors need to put in anywhere between ₹100 and ₹5,000 for lump sum investments across fund houses.
It being a Fund-of-Fund, a two-layer expense ratio is incurred. Exit loads are applicable if you sell the fund within one year.
The fund units can be sold at the respective fund house directly and cash will be credited to your bank account.
Tax treatment is similar to Gold ETFs.
A major advantage of gold funds is that Systematic Investment Plan (SIP) option is available and a demat account is not necessary. This aids in disciplined investing. There are also no liquidity risks like in gold ETFs. Among the several gold funds available, ICICI Prudential Regular Gold Savings Fund and SBI Gold Fund are options to consider. Both schemes have competitive expense ratios (about 0.50%) and their tracking difference is better than category average.
There is a risk of capital loss as the fund prices are linked to gold price movement.
Digital GoldWhat is it?
Digital Gold is the newest form of investing in the yellow metal. MMTC-PAMP, SafeGold and Augmont Gold are the three players that offer this product as of now, directly or through partners. Here, you hold gold in a digital form in an account. Against your units, equivalent amount of physical gold is bought and stored in vaults.
The risk here is that the digital gold is an unregulated avenue unlike SGBs, which are under RBI, and gold ETFs/mutual funds which are under SEBI.
The regulator has also been lately advising stock brokers and investment advisors to refrain from providing platform for buying/selling/dealing in digital gold.
Following SEBI’s guidelines, NSE had earlier instructed all members, including stockbrokers and wealth managers, to stop sale of digital gold from September 10.
However, the three players have designated trustees and regular audits are to be conducted on the physical gold stored in their vaults.
If the convenience of transacting gold through digital platform attracts you, you need to tread carefully. Here are some of the features you need to know.
Where to buy?
You can buy digital gold directly from one of these three players through their website. Secondly, it can also be bought through digital wallets, banks, etc., who have partnered with them. Google Pay, Amazon, Flipkart and CoinBazaar are some of the partnered platforms. The partner list for all the three is available on their respective websites.
Name, mobile number and address proof are the basic requirements. Some make the Aadhaar and PAN mandatory for buying digital gold.
The major attraction in case of digital gold is that one can buy gold ranging from as low as ₹1. Again, this varies between platforms used. For instance, SafeGold has a minimum investment limit of ₹10.
Goods and Services Tax (GST) of 3 per cent will be levied on the value of purchase. Costs such as customs duty and other taxes applicable are in-built within the prices. Payment gateway charges are also applicable (2.9 per cent in case of MMTC-PAMP). For the first five years there is no storage cost. Beyond five years, SafeGold levies 0.24 per cent and MMTC-PAMP charges 0.4 per cent as storage cost.
At the time of exiting, if you opt for redemption in the form of physical gold, then the making charge, delivery charges, etc., will be levied. Also, there is a wide spread between the buy and sell prices, which will also be a cost factor at the time of selling.
The maturity period for digital gold in case of Augmont is five years and with SafeGold it is ten years. MMTC-PAMP does not have a cap on holding its digital gold. Several options are available for exiting. One, you can get physical gold delivered in the form of coins or bars either in part or in total. Second, you can convert it to jewellery from partner jewellery stores. For instance, Tanishq has tied up with SafeGold. In this case, making charges and other charges levied at the time of purchasing jewels will be applicable. The third option is to sell the gold on the platform and redeem in the form of cash.
In case you redeem in the form of cash, STCG (holding period less than three years, taxed at slab rate) and LTCG (more than three years, 20 per cent tax with indexation) are applicable.
Phillip Peters is an independent journalist, entrepreneur, digital marketer and press release publisher. He has a soft spot for technology, gadgets, cryptos and writing about health and politics. He also loves travelling the world! Phillip has been working with KukaUSA full time since September 2018.