Should You Invest In Physical Gold, Gold ETFs or Sovereign Gold Bond (SGB) this Dhanteras?

By | October 10, 2017

If you are looking to buy gold for a long-term investment, earn handsome returns, and also want to get tax benefit on income from such investment, then it is time to look beyond physical gold investment.

Should You Invest In Physical Gold, Gold ETFs or Sovereign Gold Bond this Dhanteras?

The festival of lights is just around the corner. Gold demand would see a surge during this time as people across the country consider buying the yellow metal to be auspicious, especially during Dhanteras. However, physical gold alternatives like Gold Exchange Traded Fund (ETF) and Sovereign Gold Bond (SGBs) have gained popularity because of their unique features.

If you are looking to invest money in gold this Dhanteras, then you must understand its benefits in terms of liquidity, safety, tax efficiency and ease of investments.

Let us check out each aspect one by one and find out how you should invest in gold this festive season.

Liquidity Aspect

Investing in physical gold means high liquidity. This is an investment that you can exit anytime at the prevailing gold buying rate, however, it is important to note that the buying and selling price of gold varies significantly. Suppose the selling price (the price at which bullion merchant sells the gold) is Rs 30K/10 gm, then the buying rate (the price at which the bullion merchant buys the gold) could be as low as Rs 28K/10 gm. So, if you buy and sell gold in a short duration, then you may lose lots of money due to the difference in buying and selling rate.

Gold ETF is also very liquid and trades on the stock exchange. You can sell it during a trading session at the real-time rate and the cost of selling is very low in comparison to the physical gold. You just need to pay the brokerage (including government duty) when you sell the ETF. There is a very thin difference between the buying and selling rates of gold ETF on the stock trading platform.

You can buy SGB through authorised banks and NBFCs as well as through the stock exchange trading platform. The expense of buying or selling SGB is very small in comparison to the physical gold. SGB can be bought or sold similar to ETFs, however, the tax implication will be different.

Safety Factor

Investment in physical gold is highly susceptible to theft and burglary, however, if you invest in an ETF or SGB then you can keep the investment safely. Physical gold requires careful handling and is unsafe when kept at home. ETF and SGB are kept in the dematerialised form and held in a DEMAT account, therefore it is very safe and easy to handle.

Tax Efficiency

If you hold physical gold, ETF or SGB for more than 3 years, then it is considered as a long-term holding and becomes eligible for long-term capital gain (LTCG) at 20% with indexation. Selling before 3 years is considered as short-term capital gain (STCG) and the gain is taxed as per applicable slab rate of the individual.

However, SGB allows one more advantage on the tax front. If you hold it until maturity and redeem it after it’s maturity period, then the complete gain is tax exempt.

Return Benefit

The rates of ETF and SGB are linked to the physical gold rates. So, the capital appreciation benefit of all the three investment products are same, however, in addition to capital gain benefit, SGB also offers interest at 2.5% p.a. on the invested value to its investors. So, if you are investing for a very long period, then 2.5% p.a. interest can make a big difference to the overall return.

Loan Facility

Loan against gold is a very popular borrowing product. You can get the loan against your physical gold investment by pledging it with the bank. Similarly, loan facility is also allowed against SGB as well, however, such loan facility is not allowed against the ETF.

Investment Flexibility

At the time of investment, you can buy and accumulate as low as 1 gram of gold while buying SGB or Gold ETF. But, you may find it difficult to buy and maintain 1 gram physical gold. Facility of buying small quantity can multiply your investment benefit as you can gradually accumulate gold in your account and make a big portfolio and also get the advantage of rupee cost averaging.

So, it is time to look beyond physical gold investments and put your money in new age gold products such as SGB and Gold ETF, especially if a long-term investment with good returns and tax benefits is on your mind.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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