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Everything that glitters isn’t gold but the shine of gold is timeless! Gold has traditionally shielded Indians from the Rupee depreciation and thus in a way has offered protection against inflation.

This explains why buying gold has never gone out of fashion in India. For any auspicious occasion—Akshaya Tritiya, Dussehra or even weddings—gold is a must.

That said, if investment is the only motive behind buying gold, it is prudent to analyse the various gold investment options. Not sure what the various types of gold investment are?  Well, we've got you covered.

Different types of gold investment options are:

  1. Gold Exchange Traded Funds (ETFs)
  2. Gold Savings Funds (Gold Fund of Funds investing in Gold ETFs)
  3. Physical gold (bars and coins)
  4. Sovereign Gold Bonds (SGBs)

Gold ETFs and gold savings funds

Taking the mutual fund route to invest in gold was economical and tax effective until recently. Not anymore, especially if you fall under the highest tax slab.

Under the old tax regime, capital gains arising from investment in gold ETFs and gold funds held for more than 36 months were classified as Long Term Capital Gains (LTCG). Taxpayers/investors could claim indexation benefits to lower their tax liability and pay tax at 20% on such gains.

However, according to the provisions of the Finance Act 2023, gains made on any investment in a mutual fund having an equity exposure of less than 35% will be deemed as Short-Term Capital Gains (STCG). In other words, these gains will be added to the income of an investor and will be taxed as per the applicable slab rate.

This has been a dampener for gold ETFs and gold savings funds from the perspective of long-term investors.

Short-term investors—who intend to invest in gold for a time horizon of less than 3 years—may still find merit in gold ETFs and gold savings funds.

How attractive are physical gold purchases?

The new tax regime has made physical gold more attractive as compared to gold ETFs or gold funds because you can still opt for indexation benefits on LTCGs made on physical gold. However, you shouldn’t ignore the constraints. If you take into consideration import duties, Cess and GST applicable on physical gold purchases, the additional cost built up is to the tune of 18%.  Besides this, you also need to consider the cost of keeping physical gold safe.

Sovereign Gold Bonds 

Given the fresh developments on tax front, Sovereign Gold Bonds or SGBs have become extremely attractive.

Benefits of investing in SGBs:

  • Gains are tax-free at maturity/redemption
  • Exit option is available after 5th year (here gains are taxable, while an indexation benefit is available)
  • SGBs pay you 2.5% interest (semiannual, taxable)
  • SGBs can be placed as collateral to avail of loans

Thus, SGBs are suitable to long-term investors who can stay invested for 8 years—i.e. until maturity/redemption.

Electronic Gold Receipts (EGRs)—an emerging way of investing in gold

Despite being the second largest importer and consumer of gold, until recently India didn’t have an efficient system to re-circulate gold already available in the system.  With an aim of facilitating spot trading and market-driven price discovery mechanism, SEBI gave its green signal to establish a gold exchange in September 2021.  Following this, BSE rolled out EGRs in October 2022.

What is EGR?

EGR is a receipt held in a Demat account issued against physical gold. It is tradable at its spot price just like any stock in the cash market. They can be reconverted to physical gold.

For taxation purposes, it is treated just as physical gold—i.e. indexation benefit is available after three years of continuous holding and LTCGs will attract a tax of 20%. Furthermore, according to Finance Act 2023, the conversion of physical gold to EGR and vice-versa, by a SEBI-registered vault manager won’t attract any capital gains tax.

Will EGR become a popular gold-backed instrument in times to come? Remains interesting to see.

How about derivatives based on precious metals?

Any derivatives exposure, unless initiated for hedging, is highly speculative and short-term in nature. Thus, betting on gold through derivatives contracts (futures and options) is more suited for short-term investors rather than long-term investors who are looking to invest in gold from a portfolio diversification perspective.

In summary

Under changing investment climate and tax environment, SGBs have risen as a prominent alternative for long-term investors. Short-term investors—those with a time horizon of less than 3 years—may still prefer to invest in gold ETFs and gold savings funds.

 

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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