Akshaya Tritiya: Invest in sovereign gold bonds, not solid gold

They're better as they pay interest and aren't taxed at maturity, but you need to invest long term

Last year, if you had bought gold on Akshaya Tritiya, a popular festival when it is considered auspicious to buy the yellow metal, you would be sitting on a loss of 3.5 per cent as on April 26.

Nonetheless, market experts are currently bullish on gold.

"Despite the Federal Reserve’s interest rate hike, real interest rates will remain negative. Also, the rise of populism in Europe (read Brexit) will keep investors interested in gold. The current drop in prices is a good opportunity to buy," says Chirag Sheth, research consultant, South Asia, Metals Focus.



Buying interest in gold on Akshaya Tritiya has been consistent. During the past few years, about 15-25 tonnes have been bought on this day. According to GFMS Thomson Reuters estimates, Indians bought 17 tonnes on Akshaya Tritiya last year. At current market prices, this translates into Rs 5,000 crore. Market experts expect even higher demand for gold this time – more than a billion dollars worth of sales.

Investors buy gold for a variety of reasons. Some buy it as a hedge against inflation and others accumulate it for a marriage in the family in the future. In rural India, people trust gold more than other financial assets. Financial planners, however, advise that allocation to the yellow metal should not exceed 10 per cent in one’s portfolio. For investors the best strategy is to buy gold in tranches.

Sovereign gold bonds, which the government introduced a few of years ago, are today the best instrument for investing in gold. These bonds pay an interest of 2.5 per cent on the first year’s price. Since they can be kept in the dematerialised form, they don’t require payment of making charges or value-added tax, as happens when you purchase physical gold. These bonds are also listed on the stock exchanges. Holders of these bonds get cash equivalent at the time of maturity eight years later, which is tax free. These bonds can be bought from banks, online bank accounts, post offices, and so on. Says financial planner Gaurav Mashruwala: “Sovereign gold bond is the best option for investing in gold. The government offers a discount on the price at the time of purchase. Investors also earn an annual interest. However, before you decide to buy, you must be clear about your intentions. If you wish to invest small amounts every month for investment purpose, you may still consider gold exchange-traded funds (ETF) or fund-of-funds (FoF).”



When compared to sovereign bonds, buying ETFs or FoFs offered by mutual funds has a few disadvantages. Gold ETFs don't pay an interest. Investors also have to pay an annual charge called expense ratio.  

If you are buying physical gold, look for the following features: 999.9 has the highest purity but not all jewellers sell it. Standard 999 purity gold per 1 gram, according to IBJA’s opening price (on Tuesday), is Rs 2,922 while standard 995 purity gold price is Rs 2,907. The 22 carat or 916 purity gold, which is used for jewellery making, costs Rs 2,677 per gram. So, check the purity and match prices and decide how much you are paying and whether it is worth what you are getting.

Mashruwala recommends that people should buy coins from places that also buy them back when you wish to encash your gold holdings. Do keep the bill which will come in handy at the time of sale.

Which form of gold should you buy?

Long-term investors: Sovereign gold bonds. Available in electronic format, pay interest, redemption at maturity is tax free. Interest paid is taxable at marginal income tax rate.

Regular investors: Gold fund of funds or ETFs for gradual accumulators. Available in electronic format. Units held for less than three years taxable at marginal tax rate. If held for more than three years, taxed at 20 per cent with indexation benefit.

Physical buyers: Coins are available online at ecommerce sites. Banks and jewellers are offline sellers. When buying online, compare prices and check whether seller is a jeweller or refiner. Buy from a BIS-certified or hallmarked refiner. Also check purity of gold used.