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How To Pick The Right Gold Investment?

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Gold has gained attention among investors this year. Thanks to uncertainty induced by the coronavirus pandemic, the precious metal has become the best performing asset class for the year, taking gold rates in India as well as in the international spot markets to new all-time highs.

Experts often suggest including the metal as part of one's investment portfolio to diversify risks especially those associated with the stock markets.

 

In today's digital age, whether you wish to purchase physical gold or in paper form, you can easily buy the metal online. However, purchasing gold and investing in the metal are not the same. When you purchase gold jewellery, you are also paying for irrecoverable charges like making charges, GST, embedded stones, etc. Same goes for gold bars or coins, whose additional costs cannot be recoverable at the time of sale especially if you choose to invest for less than 3 years.

The decision on how you should put money on gold will rest on your personal intentions. Here are some factors to consider to pick the right option.

How To Pick The Right Gold Investment?

Purpose

If you looking to buy gold for reasons like marriage or as a present, physical gold would be a natural choice. Some choose to invest in risky assets like equity and use the returns from those investments to purchase gold later while others choose to make small purchases of physical gold periodically.

These purchases will purely be on an emotional basis and not for investment. Physical gold is not the best choice for investment purposes.

Liquidity

If you are looking to invest, liquidity is an essential factor. Gold needs to be bought when prices fall and sold when it peaks to make the best returns. The metal's price fluctuates throughout market hours and changes every minute.

Gold ETFs (exchange traded funds) are the most liquid form of investment for the metal, that can be bought and sold like stocks on the exchanges. There are several gold ETF options to chose from in the Indian stock markets with almost same price range, as all of them derive their prices from the same metal. You could pick an ETF based on expense ratio and other costs, convenience and reputation of the asset management company.

 

Gold funds also provide liquidity. These are mutual funds and therefore can be redeemed by selling them back to the fund house that is offering such a fund based on the NAV (net asset value) for the day. Gold funds, however, have exit loads.

Another electronic form of investment is the RBI issued sovereign gold bonds which take 8 years to mature, with an option to exit from the fifth year.

Amount

How much money you wish to or can invest in the metal at a certain point in time also dictates your choice of investment as all of them have a minimum investment limit. SGBs also have a maximum investment limit.

When you need to withdraw the investment, that is, how long you can hold it will also matter. If liquidity is not an issue, SGBs come with an interest of 2.5 percent per annum, tax benefits and the benefit of appreciation in the price of the metal at the time of sale.

Depending on how much money you can set aside for the investment and how long you wish to hold it, you can choose among the various options.

Tax liability

Gold ETFs, gold mutual funds and physical gold have the same tax implications. If held for less than 3 years, these are considered as short term investments that are taxed at the rate applicable as per investor's tax slab. On the other hand, returns from investments held for longer than 3 years are taxed as long term capital gains at the rate of 20 percent.

In the case of SGBs, interest earned is taxed as income from other sources while capital gains from bonds, when held till maturity are tax exempt.

Returns

As mentioned before, investment and buying gold are different. If you wish to get better returns on your investment, you could choose to put money on gold ETFs, gold funds or SGBs. Gold ETFs are best for the short term.

If prices continue to rise, as the coronavirus pandemic takes longer to come under control, you could make good returns within a year. Same goes for gold funds, but you will have to consider the exit load and taxes.

As for long term investment, SGBs provide the dual benefit of interest and appreciation in the price of gold, however, it is hard to predict the market condition in 8 years. As gold is currently trading at peak levels, prices could subside in a couple of years, if global economic growth picks up.

Conclusion

Consider the various angles of returns, cash available, investment horizon and returns earning capacity to decide on the type of investment that will suit your financial goals the best.

Story first published: Monday, August 3, 2020, 21:16 [IST]
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