Gold! A sentiment of our culture which we see every now and then. For Indian households, it's a haven for investment. When we talk about "Jaaydad" one inherits, its always in the form of land, house or gold jewellery. How one can forget the epic movie scenes from Hindi movies where "Jab Kuch na ho tab maa ke haathon ke Kangan hote hai ."
Already Popular Investment
By far, the trend I have looking across families and culture, Gold is invested in Physical form for primarily two purposes:
1) Gudiya ke Shaadi ke liye inhe sambhale hai (For marriage speculating the prices will be too high in the coming years)
2) As I said already... Jab Kuch Nhi Hota tab.. (Acts as a cushion in times of financial distress)
The great thing about physical gold is, it's easy to liquidate in India, any gold shop is readily available for its buyback. No wonder, it is a great choice for all households - A thing that you can see, you trust and you know will get you money whenever you want.
I really can't argue the emotional quotient of gold we have in our culture but, ultimately we are here to talk about money. So let's do it!
Physical Gold
Here, let's discuss the possessing of gold in either the physical or digital form(gives the comfort of home). In the discussion ahead, we will consider 24K 99.9% pure gold which may be accredited worldwide(MMTC-PAMP) or at least in India(MMTC).
Keeping in mind that I don't sponsor any particular retail chain(Koi toh sponsor kar do), I am linking a standard place to buy gold here.
When we buy gold for the sole purpose of investment we do it in terms of gold bars because of its lower making charges( bigger the bar, lesser the cost of making per gram, tougher to liquidate). Let's talk about some numbers now:
Investment amount: ₹ 1 Lakh
Price of the gold: ₹ 4,639/gm
Making charges: 0.2% per gram
GST: 3% per gram
Total Investment Holding with physical bar: 20.88gm of Gold
Total Investment Holding digitally: 20.93gm of Gold
Note: Difference between retail gold and digital gold is that you get retail gold at a fixed price for a day while digital gold can be purchased at live market value and you don't worry about the safekeeping of digital gold.
Sovereign Gold Bond
Most of you might know about them already, Every year RBI issues sovereign gold bonds, which are a more secured form of investments. I will not dwell into its details, here's a link about it in brief.
Few things in these bonds that we will take into consideration:
- 2.5% Interest per Annum on the initial investment (Tax applicable as per your Tax slab - No TDS, needs to be declared)
- Buy in units of 1 g.
- 5 years lock-in period
- 8 years of maturity
- No Tax on Capital Gains on maturity or redemption(between 5-8 years)
- No GST
Let's buy our bonds for the same investment amount -
Investment amount: ₹ 1 Lakh
Price of the gold: ₹ 4,639/gm
Total Certificate value of SGB: 21g of Gold worth ₹ 97,419
Remaining value: ₹ 2,581
Note: RBI offers a discount for online applicants. Probably your bank will be providing such bonds already.
Gold ETFs
Gold Exchange Traded Funds (ETF) are basically exchanged Gold in the stock market. You need to own a Demat account, unlike the other options to invest in ETFs. Popular ETFs which was first started in 2007 in India, now grown to many offerings:
Goldman Sachs Gold ETF
Quantum Gold Fund
SBI Gold ETF
Axis Gold ETF
Kotak Gold ETF
ICICI Prudential Gold ETF
UTI Gold ETF
HDFC Gold ETF
It's like buying gold on the stock market (It is considered that the value of 1 unit in the market is nearly the cost of 1 gm of Gold). It comes with high liquidity and benefits of the live market.
However, returns may be less as taxes are applicable in either form STCG(Short term Capital Gain) Tax and LTCG(Long Term Capital Gain) Tax. In STCG, you remain invested in the ETF units for 3 years or less and tax is applicable as per your tax bracket and in LTCG, you remain invested for more than 3 years and tax is applicable at 20% tax after indexation(basically, inflation correction).
Investment amount: ₹ 1 Lakh
Price of the gold: ₹ 4,639/gm
Brokerage and AMC charges: 1.5%
Total Fund Value: 21 Units of Gold ETF = 21gm of Gold worth ₹ 97,419
Extra Charges: ₹ 1,462
Remaining: ₹ 1,119
Gold Mutual Funds
These mutual funds invest in Gold ETFs, that directly or indirectly invest in gold reserves. Investments are usually made on stocks of gold producing and distributing syndicates, physical gold, and on stocks of mining companies.
These funds don't restrict you to invest per unit but give you the flexibility of investing as little as you want. Since Gold funds are non-equity instruments, taxes for STCG as per tax slab of the investor and for LTCG - straight 20% after indexation.
Since underlying instrument is usually 99% allotment of Gold for these funds. Therefore, the funds don't give an exceptional return like other mutual funds but give a decent return owing to the rising price of Gold though it hits a high during some seasons and festivals.
Investment amount: ₹ 1 Lakh
Expense Ratio/AMC charges: 1%
Comparison of Returns
To be fair to all options, we will set the base of comparison for 5 years down the line, looking at the graph, it's safe to assume that in these 5 years gold will have a value of 25-30% more of its 5-year-old value. But! We will mellow down our assumption to 20%( 1.2 x ₹ 4,639/gm = ₹ 5567/gm ).
Physical Gold
20.88gm of Gold now gets: 20.88gm x ₹ 5567/gm = ₹ 1,16,239 ( 16.2% Increase)
Digital Gold
20.93gm of Gold now gets: 20.93gm x ₹ 5567/gm = ₹ 1,16,517 ( 16.5% Increase)
SGB
21 units of SGB: 21 x ₹ 5567/gm: ₹ 1,16,907
2.5% Interest p.a. on ₹ 97,419 for 5 years: ₹ 12,177
Tax on Interest as per 20% tax slab: - ₹ 2435
Extra with 3% Interest p.a. on ₹ 2581 from Bank for 5 years: ₹ 2,997
Total Earned : ₹ 1,16,907 + ₹ 12,177 + ₹ 2,997 - ₹ 2435 = ₹ 1,29,646 ( 29.6% Increase with just 20% Increase in gold price)
Gold ETF
21 units of SGB: 21 x ₹ 5567/gm: ₹ 1,16,907
Tax on Capital Gain as per 20% tax slab(LTCG): 20% of (₹ 1,16,907 - ₹ 97,419) = - ₹ 3897
Extra with 3% Interest p.a. on ₹ 1,119 from Bank for 5 years: ₹ 1299 (Argument for better use of the money like FD or invested in physical gold or any other way, create a much difference, Eg, 7% on FD of ₹ 1,119 = ₹ 1,583 or 20% increase in gold worth ₹ 1,119 = ₹ 1,343)
Total Earned: ₹ 1,16,907 + ₹ 1,299 or ₹ 1,583 - ₹ 3897 = ₹ 1,14,309 - ₹ 1,14,593 ( 14.3%-14.5% Increase)
Gold Mutual Fund
22% growth in the fund value (on the lines of Gold): ₹ 1,22,000
Expense of AMC at 1% : ₹ 1,220
Tax on Capital Gain as per 20% tax slab(LTCG): 20% of (₹ 22,000 - ₹ 1220) = - ₹ 4156
Total Earned: ₹ 1,22,000 - ₹ 1,220 - ₹ 4156 = ₹ 1,16,624 (16.6% Increase)
For an investment of ₹ 1 Lac for 5 years,
Brief Comparison
In the next article about gold, we will discuss the trends of Gold over the years in various scenarios. Till then, Happy Investing!
Totally Agree.. The main essence of Gold as currency of the world is old and well-established! Moreover the economic strength of a country is defined by its gold reserves. And literally the trend of gold prices have outperformed testing times! Gold is a must as a part of your Investment portfolio.
Good article Pranay. According to the book "The new Case for Gold", written by James Rickards, 'GOLD' is what runs a economy, and an investor should have at least 11% of it's liquid assets in 'GOLD'.