Gold as an asset class attracts a lot of attention after the price rally. It has always been important in Indian mindsets, as a measure of family wealth. The stock market correction contributed to the rally at a certain point of time.
Another interesting aspect of present times is that investments in gold have taken many different forms –
- Gold jewellery
2. Gold bars and coins
3. Gold ETFs (Exchange-Traded Funds)
4. Digital Gold/ other forms of e-gold
5. Gold Deposit Scheme
6. Sovereign Gold Bonds
Let us examine each of the options:
GOLD JEWELLERY – IS IT AN ASSET CLASS?
It will remain important as a social parameter of prosperity.
If one looks at it, in terms of pure investment, we observe the following:
- Very high making charges
2. Instant devaluation on stepping out of the showroom
3. Risk of theft
4. Cost incurred on safekeeping
5. Concern on purity
6. High transaction charges
7. Wide difference between sale and repurchase price
GOLD BARS AND COINS
- Purity concerns are less
2. Difference between sale and repurchase price is less
3. Safekeeping is a concern
4. Liquidity is high in the both the cases above. One can always get some cash on selling it.
GOLD MONETISATION SCHEME
This is introduced to bring family assets into circulation.
The gold one owns can be taken to a Collection and Purity Testing Center (CPTC). The CPTC gives a certificate, which can be taken to a bank to open an account. The account shows the value of gold deposited, and interest is paid at the rate of 2.5% p.a.
- One can opt for gold or rupees as a form of proceeds on maturity.
2. It saves the cost of safekeeping
3. Earnings exempted from capital gains tax, wealth tax and income tax.
4. Distribution network is poor. The scheme is available with very few branches of designated banks.
5. Interest and capital gains are exempt from tax.
DIGITAL GOLD/ E-GOLD AS AN ASSET CLASS
It is buying physical gold through digital mode.
One can buy from MMTC-PAMP or Digital Gold India. They store the gold for the customer in their vaults for 5 years (MMTC-PAMP) or 2 years (Digital Gold India) without any charges.
- Investing small amounts every month through SIP is possible. Minimum investment is Re.1/-.
2. The issuer levies a one-time charge for storage, which is included in the price of gold.
3. The difference between sale and repurchase price is 2.95%.
4. Units can be redeemed on purchase of gold jewellery from approved vendors.
5. There is an option of taking delivery in physical gold.
The issue is a lack of regulatory mechanism governing the scheme.
This is investment in funds, which in turn invest in gold. The investment is backed by physical gold. One can buy from a broker.
- There is no option of delivery in physical gold.
2. The fund managers may invest in derivatives or gold monetisation scheme. The returns may not correspond to the gains in gold pricing.
3. It is saleable on the exchange, only if buyers are available at that particular time. Hence, liquidity is low.
4. Systematic Withdrawal Plan (SWP) is available. It is possible to generate a monthly income through SWP, at a rate higher than that offered by bank fixed deposits.
5. Interest and capital gains are exempt from tax. However, sale and purchase in between will attract tax like any other investment.
The process is not transparent, as mandatory disclosures are not allowed.
There is no approved grievance redressal mechanism.
SOVEREIGN GOLD BONDS
Sovereign Gold Bonds are a kind of GOI Security. The government pays 2.5% on it, while other G-Secs for 5-8 years may give around 6.5% in the present scenario. The difference is what the government invests in a fluctuation reserve.
Sovereign Gold Bonds are not backed by physical gold, so the issuer is exposed to risk. The fluctuation reserve takes care of that.
- Interest income and capital gains are exempt from tax
2. Discount of 1% on online purchase
3. Available at a discount
4. It is a scheme for retail investors with a ceiling of 4 kg
5. On anniversary date or maturity, you can sell on prevailing prices.
Practically, the issuer plays 2.5% p.a. for investment in gold. The benefits from an appreciation in value remain the same as in gold purchase of any other kind.
However, monthly SIPs are not possible. One has to invest lump-sum, and trust the GOI guarantee.
SHOULD YOU INVEST IN GOLD AT 50K?
The prices are high for an entry point. But international prices of metal are slated for an increase as stimulus packages are at unprecedented highs.
The future is yet uncertain, till pandemic impact is wiped off.
What goes in favour of gold as an asset class?
- One may choose to invest in a SIP scheme, rather than a lumpsum investment to milk the rally in prices.
2. One may invest 5% -10% of total investments as a diversification strategy.
3. One will anyway need gold for social needs like weddings etc. So, there is no harm is storing it to safeguard against an inflationary pattern.
4. One can start conversion of electronic versions of gold to physical gold, a few months or years prior to the occasion.
5. One can start converting existing jewellery to Sovereign Gold Bonds, to avail of tax benefits and earn 2.5%
Hiren Vaid of Economic Times tells you why investors are putting money in both equity and gold now. Read the article here