Alternative to gold buy

This Diwali, buying physical gold may not be the only option as paper gold is a better alternative.

We are in the middle of a festive season and there will be a renewed interest among investors for buying gold. Gold has been people’s favourite for centuries. This is because gold doesn’t react with the elements and corrode. It is in low supply, therefore there is always demand for it. It is an appreciation asset. And it is a fashion accessory as well.

One of the pitfalls of owning gold, however, is in its safekeeping. You may buy your gold in the form of biscuits, bars, coins, jewelry or decorative items. But you will have to incur the added expenditure of keeping your gold items safe at home or in a bank locker. There is also the concern over the purity of the metal you are purchasing.

If safe-keeping is one of your concerns and if you don’t want to dilute the value of your investments in jewellery-making charges, and if you are unsure about the purity of the metal you're buying, here are some alternatives. They will help you invest in gold without actually buying gold.

Sovereign Gold Bond

Launched by the government of India, the Sovereign Gold Bond (SGB) scheme aims to reduce the buying of physical gold. There are plenty of advantages to buying SGB. Not only can you make capital gains through investments linked to the price of gold, you are also earning an annual interest on your investments of 2.75 per cent. Also, your storage costs and risks are done away with. This is a government-backed scheme and therefore your capital is safe. However, the value of your investments will fluctuate with gold prices. Upon redemption, you will be paid as per the prevailing gold prices.

Individual Indian residents and entities can begin with a minimum investment of one gram and go up to 500 grams in a fiscal year. These bonds are available in paper as well as demat with banks, post offices, NBFCs, and stock exchan-ges. The maximum tenor of your investment is eight years, but you have the option to make partial withdrawals in the fifth, sixth, and seventh years.

Long term capital gains on your SGB units after the full tenor are tax exempt. Long term gains on redemptions between years five and eight will be taxed with indexation benefit at 20.6 per cent and 10.3 per cent without indexation.

If there are pitfalls to investing in SGB, they are the occasionally wild fluctuations in gold prices which could hurt your short term gains. However, by remaining invested in the bonds, you are allowing yourself a chance of good long term gains. Also, an individual with a large investing capacity can invest in no more than 500 grams (approximately `15 lakh today) in a year. Nevertheless, the individual is free to buy 500 additional grams in the name of his family members who are Indian residents.

Gold ETFs

Most leading asset management companies (AMCs) have gold exchange traded funds. Like stocks and mutual funds, ETFs can be bought and sold on stock exchanges. There are no entry and exit loads. There is transparency of price, and your investments are linked to real-time prices of gold. You can enter the market with holdings as small as one gram. There is no upper limit to how much you can buy. Your holdings are in a demat form, therefore there is no risk of theft and fears of purity of metal. You may have to pay brokerage charges on buying and selling.

Gold Mutual Funds

Many mutual fund companies have products that invest in, among other things, gold ETFs. You can enter such schemes with sums as small as `500, which is almost a sixth of the price of a gram of gold today. These funds do not have investment limits and you can buy and sell units of the fund as per your requirements. You will have to play short and long term capital gains tax on redemption. Units held longer than three years will be eligible for long term gains taxation of 20.6 per cent with indexation benefit, and 10.3 per cent without indexation. For redemption of units held for less than three years, you will be charged short term capital gains tax as per your tax slab.

The writer is the CEO of BankBazaar.com