Paper gold: a smart investment option

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India’s love affair with gold is no secret. And Indians love to own it in the every form – jewellery, gold coins, and even gold bars. Many Indians buy gold jewellery but they never use considering them as investment. Investing in physical gold (conventional way) has some disadvantages such as inconvenience of storage, high transaction cost, impurity risk and lack of liquidity.

Soumya wants to know how one can invest in the yellow metal in paper form.

Ravi: Some smart ways of investing in gold are through Gold mutual funds (gold saving funds), Gold ETFs and Sovereign Gold Bonds. Now, each of these has their own merits and demerits.

Soumya: What is Gold ETF?

Ravi: Gold ETFs have gold as the underlying asset so as to provide investment returns that closely track the performance of domestic prices of gold. For every one unit of Gold ETF issued, the fund holds gold in the form of physical gold of 99.5 % purity. Each ETF unit typically represents one gram of gold. These are offered by mutual fund houses and are listed on the stock exchanges. Since these are listed and traded on a stock exchange, you need to have a demat and trading account for buying and selling these ETF Units.

The benefits of investing in Gold ETF are:

  • Units are backed by corresponding units of physical gold
  • Transaction is possible in smaller quantities
  • You have greater liquidity compared to physical gold
  • Returns are close to that of domestic price of gold
  • Purity of gold is guaranteed and each units are  backed by physical gold of high purity
  • Listed and traded on stock exchange.
  • Transaction is possible on the real time gold prices

Soumya: What about Gold saving mutual funds?

Ravi: A Gold saving fund is a mutual fund that invests in the units of Gold ETF. So it will provide returns that closely correspond to the returns of its underlying Gold ETFs. The benefits are you can:

  • Invest in the precious metal without having a Demat Account
  • Through Systematic Investment Plan (SIP) of gold mutual funds, one can affordably have disciplined investment in gold. One can invest as little as Rs 100 every month in gold funds.

You should note that the expense ratio is higher than in gold ETFs and returns are slightly lower than that of gold ETFs.

Soumya: What are gold sector funds?

Ravi: Let me tell you about Gold Sector Funds. These funds invest in shares of companies engaged in gold mining and processing. Though gold prices influence these shares, the prices of these shares are more closely linked to the profitability and gold reserves of the companies. Therefore, NAV of these funds do not closely mirror gold prices as in cases of Gold ETFs.

Soumya: What about the Taxation of gold ETFs and gold saving mutual funds

Ravi: Gold ETFs are taxed like non-equity mutual funds. There is short-term capital gains tax and long-term capital gains tax with indexation benefits.

Short term capital gain tax is applicable if the units are sold with 3 years. The gain is added to the total income and taxed as per his/her tax slab. Long term capital gain tax is applicable after 3 years @ 20% with indexation.

Soumya: I have heard about Sovereign Gold Bonds…

Ravi: Sovereign Gold Bonds are government securities denominated in grams of gold which are issued by Reserve Bank on behalf of Government of India.They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.  The benefits are:

  • Guaranteed annual interest at the rate of 2.50% (on the issue price)
  • Sovereign guarantee on the redemption money as well as on the interest earned
  • Can be traded and redeemed from the 5th year with government
  • No tax deducted at source on the proceeds from sovereign gold bond redemption. You can also claim indexation benefits along with long term capital gains when you decide to transfer the bond.
  • More importantly, long-term capital gains are exempt from taxation when Gold Bonds are redeemed.

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