 "Gold investment: ETFs can be a better option than bonds")
For a long time, the government has been trying to curb gold imports. Recently it launched two new initiatives - gold bonds and gold monetisation scheme - to control the yellow metal import and also utilise the idle gold in the country. The benefits of these, however, seem to be limited. Gold imports are expected to fall by about five per cent in the next 12 - 18 months.
Gold bonds
These are substitute for buying physical gold. Under this scheme, RBI will issue bonds in the denomination of 2 gms, 5 gms and 10 gms of gold. The maximum annual limit for investment under this scheme is 500 gms each person. The bonds would be issued for a period of five to seven years and redemption value will be decided as per the prevailing market price of gold at the time of maturity. Investors will also receive interest payout every year.
The government has also built in mechanism to protect investors from price fluctuation. If the price of gold increases, the government takes the risk of higher prices, if they fall, the investor would be given an option to roll over their holdings for an additional period of three years. However, the interest rate is yet to be decided. The investor can also take a loan against these bonds. To provide liquidity to investors, these papers will also be listed on exchanges.
The taxation will be similar to that of physical gold. The investor will need to pay long term capital gains tax at 20 per cent with indexation for holding period of over three years.
Ideal for: These papers are beneficial if an individual buys gold purely for investment purpose. Instead of purchasing physical gold they can opt for bonds, which are more efficient as banks and jewellers selling coins and bars charge a commission. These are also ideal for individuals planning to put in a lump sum amount.
Under this, a customer needs to depost his or her gold with a bank by opening a gold savings account. It will be melted, the purity will be assessed and a gold certificate will be issued to the investor. The gold monetisation scheme will offer an annual interest rate, which is expected to be around one to two per cent. This is not the first scheme of its kind. SBI has been running a similar scheme and offers an interest rate in the range of 0.75 per cent - 1 per cent a year. The new scheme is designed to target the physical gold holdings with households and temples in the country.
However, it is difficult to see an investor parting with his or her gold, as the metal has sentimental value. A person may not be willing to see her inherited jewellery and long preserved holdings being melted away for meagre returns. Also, Indians usually have a cultural and emotional value towards their gold holdings, which are mostly in the form of jewellery and ornaments. People tend to pledge it only during a financial emergency, and as a last resort. Thus pledging gold in return for a certificate or cash is also viewed as social ignominy.
As per the data release by World Gold Council, more than 50 per cent of the gold imported in India is used for weddings and ornaments.
Ideal for: An investor who has large gold holdings in form of gold coins or bars can utilise this opportunity as the scheme will provide interest pay out and also reduce the risk of holding physical gold as a reserve.
Returns from the two government schemes are marginally higher as compared to the returns from exchange-traded funds (ETF) and gold mutual funds (MF), which do not offer the additional yearly interest. Rather, ETFs and MFs have an expense ratio of around one per cent. However, a systematic Investment plan (SIP) in funds will help to generate higher returns in the long term as it reduces the average buying cost. In case prices fall, losses from SIP will be lower as compared to lump sum investments. ETFs therefore make more sense for those looking to invest small amounts regularly for a future goal, and later redeem the investments to buy gold at then prevailing price.
WHEN ETFs SHINE
Gold bonds
These are substitute for buying physical gold. Under this scheme, RBI will issue bonds in the denomination of 2 gms, 5 gms and 10 gms of gold. The maximum annual limit for investment under this scheme is 500 gms each person. The bonds would be issued for a period of five to seven years and redemption value will be decided as per the prevailing market price of gold at the time of maturity. Investors will also receive interest payout every year.
The government has also built in mechanism to protect investors from price fluctuation. If the price of gold increases, the government takes the risk of higher prices, if they fall, the investor would be given an option to roll over their holdings for an additional period of three years. However, the interest rate is yet to be decided. The investor can also take a loan against these bonds. To provide liquidity to investors, these papers will also be listed on exchanges.
The taxation will be similar to that of physical gold. The investor will need to pay long term capital gains tax at 20 per cent with indexation for holding period of over three years.
Ideal for: These papers are beneficial if an individual buys gold purely for investment purpose. Instead of purchasing physical gold they can opt for bonds, which are more efficient as banks and jewellers selling coins and bars charge a commission. These are also ideal for individuals planning to put in a lump sum amount.
Under this, a customer needs to depost his or her gold with a bank by opening a gold savings account. It will be melted, the purity will be assessed and a gold certificate will be issued to the investor. The gold monetisation scheme will offer an annual interest rate, which is expected to be around one to two per cent. This is not the first scheme of its kind. SBI has been running a similar scheme and offers an interest rate in the range of 0.75 per cent - 1 per cent a year. The new scheme is designed to target the physical gold holdings with households and temples in the country.
However, it is difficult to see an investor parting with his or her gold, as the metal has sentimental value. A person may not be willing to see her inherited jewellery and long preserved holdings being melted away for meagre returns. Also, Indians usually have a cultural and emotional value towards their gold holdings, which are mostly in the form of jewellery and ornaments. People tend to pledge it only during a financial emergency, and as a last resort. Thus pledging gold in return for a certificate or cash is also viewed as social ignominy.
As per the data release by World Gold Council, more than 50 per cent of the gold imported in India is used for weddings and ornaments.
Ideal for: An investor who has large gold holdings in form of gold coins or bars can utilise this opportunity as the scheme will provide interest pay out and also reduce the risk of holding physical gold as a reserve.
Returns from the two government schemes are marginally higher as compared to the returns from exchange-traded funds (ETF) and gold mutual funds (MF), which do not offer the additional yearly interest. Rather, ETFs and MFs have an expense ratio of around one per cent. However, a systematic Investment plan (SIP) in funds will help to generate higher returns in the long term as it reduces the average buying cost. In case prices fall, losses from SIP will be lower as compared to lump sum investments. ETFs therefore make more sense for those looking to invest small amounts regularly for a future goal, and later redeem the investments to buy gold at then prevailing price.
WHEN ETFs SHINE
- SIP has potential to give higher returns
- Downside is protected in the long term
- Investment can be as low as half a gramme of gold
- Easiest to liquidate
The writer is chief executive officer & founder, Right Horizons