The previous one yr gains from gold are over 40% and therefor quite impressive. This forces us to think if Gold is a good investment option. the historical returns from Gold over longer periods is much below returns from Equity. While personally I am not a big fan of Gold, it certainly forms part of asset diversification and would recommend in the range of 5-10% of the portfolio. Though the historical returns from Gold over longer periods are much below returns from Equity, it is a good hedge against fall in stock markets. Gold, other than for personal use ie for investment purposes can be held/owned in forms as under:-
(a) Physical gold.
(b) Sovereign Gold Bonds.
(c) Gold Mutual funds.
(d) Gold ETFs.
(e) Digital Gold.
Physical Gold
This was the most common and probably only way of holding gold till recently. The advantages are security and liquidity, but the cons are safety concerns and transaction costs. Moreover, culturally in India we do not sell gold other than under distress, and therefore once bought; consider it locked for long.
Sovereign Gold Bonds
This is an excellent scheme by the Govt of India to discourage physical purchase of gold and consequently reduce imports. SGBs pay 2.5% interest on a semi-annual basis making it effective interest of 2.515 %. The capital gains are in sync with prices of underlying Gold. Lock down is 8 yrs, though exit option is available after 5 yrs. So apart from gaining from movement in Gold prices, one can get additional interest also (taxed at marginal tax rates). The capital gains at maturity (or after 5 yrs) are exempt from tax. Min investment is 1 gm and max 4 kg.
Gold Mutual Funds
Mutual Funds offer a convenient means to invest in underlying Gold related financial instruments like Gold ETFs. There are generally exit loads (before 1 yr) specified by the concerned MF, and gains are reduced to the extent of management fees or expenses. The capital gains are also taxed as applicable. Min subscription is les and investor does not need Demat accounts.
Gold ETFs
Exchange Traded Funds (ETFs) have the under-lying asset is Gold. The expense ratios being lower than MFs and the easy liquidity through exchanges make them attractive. Suitable for investors who have Demat accounts. However, one should invest in only those ETFs which have high liquidity. The min investment is generally 1gm of gold which is higher than the min investment in Gold Mutual Fund.
Digital Gold
Many mobile/digital wallets are offering the facility of buying gold in very small denominations, min amount being Rs 1/-. This is a very convenient route for someone who is not comfortable with either of the above options, or who wants to invest smaller amounts. The best feature is liquidity which is almost like cash. However one needs to check the spread ie difference between buying and selling price at any given time, which is generally very high.
Tax Implications
Taxability of all options other than SBG is same ie for gains within 3 yrs it is long term taxed at marginal rate, and after three years it is short term taxed at 20%.
Recommendations
So one can fairly deduce the following:-
(a) Owning physical gold for investment purpose is wasteful.
(b) If the investment horizon is 5 yrs or more; Sovereign Gold Bonds is a good investment option for Gold.
(c) For investors without Demat Accounts, or who have smaller amounts to invest with liquidity concern and time horizon between 2-5 yrs, Gold Mutual Fund might be suitable.
(d) If investment horizon is less than 5 yrs and investor has Demat account with investible amount higher than price of 1 gm of gold; Gold ETF would be a better option.
(e) Digital Gold is convenient for someone with very small amounts to invest, and who is not comfortable with the other options given above. However, the service provider would generally impose high costs in the form of buy/sell spreads.