One of the common beliefs that I have found among many investors while travelling across the length and breadth of the country is that Indians are among the best investors in gold worldwide. But quite often, the difference between physical consumption and investment is lost. Interestingly, studies across the Indian sub-continent have found that there is a clear emotional connect between the yellow metal and its consumers. Other than commodity traders who deal in the precious metal and are not averse to selling it when found profitable to, the rest, by and large tend to hoard and pass gold down their generations. This trend is unlikely to change soon.
What has changed though is the increasing number of investors who prefer to use gold as a pure investment avenue and accumulate it with the clear cut intention of profiting from it at the appropriate time. Smart investors have historically used gold as a natural hedge in their portfolios to their equity holdings as in periods of crisis, when equities tend to weaken, gold has surged. This was clearly witnessed in the early months of 2020, when the first wave of the Covid-19 pandemic swept across the globe. So, what are the common investment avenues used by those that invest in gold? Exchange traded Funds (ETFs), Fund of Funds and of late, Sovereign Gold Bonds or SGBs.
Gold ETFs are units representing physical gold in dematerialized form. One Gold ETF unit is equal to 1 gram of 24k gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments and are listed at the premier stock exchanges, and traded just like the stock of any company. A demat account is necessary to transact in Gold ETFs and debt taxation rules are applicable on the realised gains therefrom. Gold Fund of Funds, more commonly referred to as Gold Mutual Funds, are open-ended funds which invest in units of Gold ETF. The returns of these funds reflect that of the underlying Gold ETF.
While these funds are very convenient for making pre-set (for instance, SIP) purchases and sales in gold the expense ratios levied by the fund houses running them, make them marginally costlier. Its taxation is the same as ETFs. Sovereign Gold Bonds, which are the relatively new kids on the block issued by the
Reserve Bank of India periodically. The central bank issues SGBs multiple times in a year and fixes a price for each issuance.
Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. Notably, while the capital gains from these bonds are tax-free if held till maturity, they have a lock-in period of five years which deters one from cashing in on it in case of a spurt in the price of the yellow metal. A look at gold returns over the last 10 years suggests it is clearly cooling off after two back to back years of 24 per cent plus returns. But, there is bound to be some smart money accumulating it and biding time for the next gold run. When that will happen is anybody’s guess, but that it will happen isn’t being argued.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com