Don’t buy gold, invest in gold this Diwali: Chirag Mehta of Quantum Mutual Fund

While gold jewellery is bought and used for its aesthetic value, it is ineffective as an investment option. This is because of the loss in value on resale.

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By Chirag Mehta

It’s that time of the year again when people flock to the streets to grab a piece of the yellow metal to either add a touch of auspiciousness to Diwali or to add some glitter to an upcoming wedding.

But in their eagerness, very often buyers tend to splurge on gold jewellery or gold coins by convincing themselves that they are investing rather than spending as the value of the holding is likely to increase in the future. While the justification isn’t entirely incorrect, it lacks some important considerations.


Gold jewellery – a dull investment option
While gold jewellery is bought and used for its aesthetic value, it is ineffective as an investment option. This is because of the loss in value on resale. The making charges on gold jewellery, which typically range between 6-14 percent of the cost of gold (and may go as high as 25 percent in case of special designs) are irrecoverable. Also, the 3% GST paid on gold jewellery cannot be recovered on resale.

In this context, one may feel that gold coins and bars are better suited for investment. However, it should be noted that the purchase of gold coins and bars comes at a significant premium of about 5-15% over and above the gold prices. This amount plus the GST paid remains irrecoverable on sale. Also, the lower the denomination you purchase, the higher is the premium.

Smarter ways of investing in gold
Increasing awareness on the drawbacks of physical gold as an investment option has made people switch to Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds – the smarter ways of investing in gold.
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Gold ETFs are mutual funds that invest in physical gold. Each unit of a Gold ETF represents 1 gram of 24 carat physical gold. Investors in Gold ETFs do not bear making charges or storage costs associated with physical gold holdings. Moreover, Gold ETFs are traded on the exchange at the prevailing market price of physical gold, which implies that investors can buy or sell their holdings at close to the market price, without worrying about paying a premium on purchase or selling at a discount.

Sovereign Gold Bonds are government-backed securities denominated in grams of gold. Investors in Sovereign Gold Bonds are assured of market price of gold at the time of purchase and redemption.

Gold ETFs vs Sovereign Gold Bonds
At the outset, Gold ETFs and Sovereign Gold Bonds may seem similar. However, there are a few differences which are highlighted below:

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Gold ETFs

Sovereign Gold Bonds

Backing

Backed by 24 carat physical gold

Backed by government guarantee on the market price of gold

Interest

No interest is paid


Investments in this scheme are eligible to earn interest every year, payable every six months

Expenses

Returns in line with gold barring expenses such as fund management fees, storage charges and insurance costs

No making charges, premiums/discounts

No management fees

Taxation

Profit on sale is taxable. LTCG at 20% with indexation after 3 years of holding

Interest on the Bonds will be taxable. The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond


Mathematically, Sovereign Gold Bonds may seem more rewarding than Gold ETFs; however, investors need to consider additional factors such as:


Gold ETFs

Sovereign Gold Bonds

Minimum/Maximum investment

Minimum as low as 1/2 gm

Minimum 1 gm. Maximum 4 kg per individual per fiscal year

Liquidity

Can be sold anytime through your broker at transparent prices

Highly liquid given the high trading volumes on the stock exchange


8 year tenure with an exit option only from 5th year onwards. Secondary market liquidity may be constrained by low trading volumes, which means investors may have to compromise on the value due to demand-supply mismatch in the secondary market

Also, the bonds are only tradable among their tranches of issuance, thus further limiting liquidity

Resale Value

Investors can expect resale value to mirror the market price of physical gold

Though SGBs are based on market value, resale price can be impacted in absence of much demand as the bonds are non-fungible for physical gold or cash before a period of 5 years

Availability

Easy availability owing to high trading volumes

Availability depends on issuances by the government.

Although the bonds are traded in the secondary market, availability may still be an issue in case of low trading volumes.

Systematic purchase option

Investors can make systematic purchases, which mean they can invest a fixed amount of money at regular intervals with an aim to reduce the average cost of their investment over the long term.

Systematic purchases can be made by buying on the exchange or through gold mutual funds that invests in the Gold ETF.

The option to make systematic purchases is easily not available at present. It will depend on government issuances or liquidity on the stock exchanges.


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To summarize, the inefficient preference for holding physical gold has prevented investors from optimizing their gold investments. Not only do you end up paying a high price for this obsession (in the form of taxation, storage costs, making charges, high premiums, discounted resale values), but it is also prone to impurities and theft.

Financial forms like gold ETFs and SGBs are more efficient avenues for investment, with the ETF scoring over the SGB thanks to its 24 carat physical gold backing.

(Chirag Mehta, Fund Manager - Alternative Investment, Quantum Mutual Fund)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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