Yellow metal: Buy SGBs or gold ETFs this Dhanteras

Many Indians buy gold on Dhanteras as it is considered auspicious. The price of the precious metal has appreciated 32% since Diwali last year and due to the adverse impact of the coronavirus pandemic, gold, with its safe-haven appeal, has become a preferred investment destination.

Gold has emerged as the best-performing asset class this year as fixed deposit rates are at a decade-low and returns from equity funds remain poor despite the Sensex at an all-time high. Analysts say outlook for gold prices looks positive over the near to medium term. “If you are taking a cue from the massive global investment flows the metal has been attracting, have a long term view and see gold for the strategic asset it is, buying gold can be a good financial move as the asset plays a risk-reducing, return enhancing role for your money,” says Chirag Mehta, senior fund manager, Quantum AMC.

As most Indians prefer to buy gold jewellery, when it comes to making investments in gold, they opt for gold coins or gold bars. However, investors must look at Sovereign Gold Bonds, gold Exchange Traded Funds (ETFs) and e-gold, which are cost-efficient and convenient ways to purchase gold for investment purposes.

Sovereign Gold Bonds (SGB)
To time with Dhanteras and Diwali, the government launched the eighth tranche of SGB which is open for subscription till November 13. The issue price has been fixed at Rs 5,177 per gram of gold with a discount of Rs 50 per unit for an online subscription. The tenor of SGBs is eight years and the buyer has an exit option from the fifth year which can be exercised on the interest payment days. SGBs earn interest of 2.5% payable semi-annually apart.

You do not have to pay any charge for buying SGBs in the primary market. However, if you buy from the secondary market, then you have to pay one-time brokerage. Analysts say SGBs are the most optimal investment vehicle if it is held till maturity. In SGBs, an investor does not have to pay any capital gains tax if held till maturity. However, if they are traded before maturity, short-term and long-term capital gains tax will be applicable.

Gold ETFs
Gold ETFs of mutual funds, which track the price of gold, are an ideal way to invest in the yellow metal for investment purposes. Gold ETFs are open-ended funds and the returns are benchmarked on the real returns on investment in physical gold, subject to tracking errors. Investors’ interest in gold ETFs remained firm in October, with the category recording its seventh straight month of inflow at Rs 384 crore. This year so far, the category has received a net inflow of Rs 6,341.2 crore. As gold prices came off its all-time high recently, after witnessing almost an uninterrupted rally this year, it provided a good entry point for investors to invest in it.

Gold ETFs are cheaper as investors do not have to pay making charges that jewellery attracts or the service charge of banks on gold coins or bars. Also, there are no purity issues in gold ETFs. Moreover, fund houses have the negotiating power in the wholesale market where they buy gold. The savings made in the price differential are passed on to the investors. Analysts say every portfolio should have an exposure to gold and gold ETF is the best method to achieve a hassle-free gold investment.

Nitin Kabadi, head, ETF Business, ICICI Prudential AMC, says when compared to physical gold, gold ETFs offer some distinct advantages such as less worry about storage and theft as it is held in demat form, lower cost of acquisition given the absence of making charges and other related expenses. “For those investors looking to meet any future requirement of gold, they can consider doing a SIP for as low as Rs 1,000 every month in gold fund-of-funds. This will enable them to collect gold units over a period of time,” he says.

As SGBs pay interest, returns are higher than on gold ETFs or physical gold. Gold ETFs deduct fund management charges (0.5-1%) and physical gold levy making charges. On the liquidity front, gold ETF scores over SGBs. As liquidity is a constraint in SGB, those who want to do strategic asset allocation may invest in SGB. But those who do not want to hold investment till maturity should invest in gold ETFs.