Gold ETFs or sovereign gold bonds, what are the best ways to invest in gold?

Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo said that the best way to invest in gold for a short to medium-term investment horizon is by taking exposure to Gold ETF or Gold Mutual Funds as they offer good liquidity, low cost, and less volatility.

In regards to the long-term, Manchanda said, one should invest in Sovereign Gold Bonds as they offer an additional 2.5% interest semiannually over and above the capital gains.

Further, Manchanda explained that SGBs have a tax advantage that if held till maturity i.e. for 8 years, capital gains will be exempt from tax. However, it is to be noted that if an investor wishes to sell SGB bonds after the lock-in period of 5 years, then proceeds will be taxable. Also, interest received will be taxable as per the individual’s tax slabs.

Also, Manchanda suggested investors to have around 5-10% exposure to Gold in their portfolio for hedging purposes and as a diversifier in their portfolio.

According to AMFI, a gold ETF is aimed to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. In simple words, buying gold ETFs mean you’re purchasing physical gold in electronic form. Further, gold ETFs combine the flexibility of stock investment and the simplicity of gold investments. In November month, gold ETFs saw an outflow of ₹194.74 crore.

Meanwhile, sovereign gold bonds are issued by RBI on behalf of the government. This gold bond scheme is available to resident individuals, HUFs, Trusts, Universities, and Charitable Institutions. The tenure of the scheme is eight years with an option of premature redemption after the 5th year to be exercised on the date on which interest is payable.

Under sovereign gold bonds, the minimum permissible investment will be One gram of gold, while the limit for a subscription can go a maximum of up to 4 Kg for individuals, 4 Kg for HUF, and 20 Kg for trusts and similar entities per fiscal year (April-March) notified by the Government from time to time. Payments for the gold bonds can be made through cash (up to a maximum of ₹20,000) or demand draft or cheque or electronic banking. The investors will be compensated at a fixed rate of 2.50% per annum payable semi-annually on the nominal value. These gold bonds are also eligible for trading. Further, they can be used as collateral for loans.

Currently, gold prices are picking up globally as investors pin their hopes on a much softer approach in December policy from FOMC which led to a pulling back in the dollar. Indian bullion also witnessed an upside.

On Friday, spot gold rose to $1,800.22 per ounce, while US gold futures rallied to $1,812.80 per ounce. Investors are keenly awaiting next week when US Federal Reserve will announce its December policy outcome between December 13 to 14th. After a fourth 75 bps rate hike, the street is expecting a much softer hike at least by 50 basis points as inflations have shown signs of easing. Generally, lower interest rates are beneficial for bullion as they lower the opportunity cost of holding the non-yielding asset.

Back at home, at MCX, gold futures maturing February 3rd ended at ₹54,307 up by ₹256 or 0.47%.

While providing a 35 bps hike in repo rate to 6.25% in December policy, RBI also announced that resident entities will now be allowed to hedge gold price risk on recognized exchanges in the International Financial Services Centre (IFSC).

Earlier, an Emkay Wealth Management report stated that gold demand is reported to have been on a firmer footing in Q3 of this year. The demand came mainly from central bank buying, amounting to 400 tonnes for the quarter, and retail consumers. The easing of covid related restrictions in China helped push up demand in China and retail jewellery demand in India too supported the markets. Jewellery consumption rose to 523 tonnes, a 10 % year-on-year rise despite the adverse sentiment. Overall demand growth was 28% on a Y-o-Y basis.