From gold monetisation to ETFs: Various routes to a ‘safe haven’

And it’s not that you need to hoard gold in a secret corner of your home. There are other ways of investing in gold, and here we will discuss them and their pros and cons.

The old way: Gold Bars, coins & jewellery

Gold, as in the physical variety in its many avatars, is an ancient, orthodox way of investing that has tempted one generation after another. Buying gold in jewellery form has lately become popular due to the guarantee of purity through hallmarking. Coins and bars are also equally attractive investment options and you can resell them anytime at the prevailing rates. It is important that you buy the gold from authentic sellers. Banks also sell gold coins and bars, but they do not buy back and also charge a premium over the prevailing market rate, so you can explore other authentic avenues such as genuine shops and jewellers. Remember that you need to present your PAN card for purchasing gold valued over Rs 2 lakh value.

Pros: Easy to buy and easy to sell. It is highly liquid. You don’t need to be an expert for buying gold in the physical form.

Cons: You may find it unsafe to hold the gold at home. You may require a locker to keep the gold in safe custody. The resale value of gold jewellery may vary from jeweller to jeweller. Investment in physical gold is considered as a long-term option if it is held for more than three years and then it is taxed at 20 per cent (with indexation benefit).

Buying gold ETFs

Exchange Traded Funds (ETFs) are another popular way of investing in gold. ETFs are held in the DEMAT — dematerialised — form and can be bought or sold easily over a trading platform. ETFs allow buying and selling in quantities as small as one gram.

The rates are displayed live on the trading platform wherein buyer or seller can enter into a trade. ETF charges are very low in comparison to physical gold. Buyers can also invest in ETFs through mutual funds (gold fund) that invest in ETFs. If investing through a gold fund, you don’t need to open a DEMAT account.

There are various gold ETFs available in the market, and some of the popular ones are Goldman Sachs Gold ETF (Gold Bees), SBI Gold ETF, Axis Gold ETF etc.

Pros: Easy to buy and sell, live over the exchange’s platform. No chances of theft. Quality is assured by the exchange. Trading charges are low.

Cons: You must open a DEMAT account to hold the ETFs and pay for its recurrent charges every year. The expense ratio of ETFs is high i.e. around 1per cent.

Buying gold bonds

The Government of India had launched the Sovereign Gold Bond (SGB) for investors. It is an attractive product that not only allows you to get the advantage of capital gain, but also gives an interest over the invested amount at the rate of 2.75 per cent per annum. Being a government-backed bond, there is negligible risk on your investment. You can buy bond for as low as two grams and a maximum of 500 grams per year. Four tranches of the SGB scheme have opened, the last of them being on July 18. So far since March, 4.5 lakh investors have opted for the SGB scheme, buying 4,908 kilos of gold from the first three tranches. These aren’t massive numbers, but the government is tweaking the program to make it attractive to a larger number of customers who continue to prefer to invest in material gold.

Pros: Redemption of gold bonds on expiry is exempt from income tax. After three years it is eligible for long term capital gain i.e. tax at 20 per cent with indexation benefit. It allows returns through capital gain as well as the 2.75 per cent interest. It can be held in paper form or DEMAT form depending on your choice.

Cons: There is a maximum ceiling to invest, i.e. 500 grams in a fiscal. The bonds also need to be held for eight years, though premature dissolution is allowed after five years.

What suits you best?

Since we are talking about investment therefore the target should be higher return, lower risk and ease of transaction. In all these aspects, the newly-launched gold bond scheme fits the investment criteria for many investors. You get a chance to earn interest along with capital gain, it is backed by the government of India and therefore safe, and if you redeem it after the full tenure then the return is exempt from tax. The initial response to SGB has been lukewarm, but the scheme has its merits and should become more popular. Broadly speaking, gold bonds should be your first choice as an investor looking to purchase gold. But if you are looking to fulfil the dual purpose of using your gold even as you invest in it, then go for the traditional way: buy some jewellery.