Long-term investors should invest in gold through SGBs, say experts

Those who desire liquidity should opt for a gold ETF having low expense ratio and high volume

Since the purchase of gold around Dhanteras and Diwali is regarded auspicious, demand for the yellow metal is likely to surge over the next few days. All investors should have a 10-15 per cent allocation to gold in their portfolios for diversification, to hedge against equity-market volatility, and for protection against inflation. Instead of purchasing gold jewellery, however, this Dhanteras-Diwali consider adding toyour yellow metal holdings through cost-efficient investment instruments.
 

Pankaj Shrestha, head, investment advisory division, Prabhudas Lilladher, says, “In the current high-inflation environment, where the rupee is depreciating and there is global uncertainty due to the Russia-Ukraine war, an allocation to gold is essential.”

Year-to-date, gold has given a return of 4.46 per cent. Over the past six months, however, its return has been negative (-4.78 per cent). Amar Ranu, head-investment products & advisory, Anand Rathi Shares & Stock Brokers, says, “Gold has been correcting over the past seven to eight months due to thestrengthening of the dollar index.”
 

Investing in gold-based financial instruments, such as sovereign gold bonds (SGBs), gold exchange tradedfunds (ETFs), and gold mutual funds (which invest in gold ETFs) is much more efficient as they carry lower costs and are safer.
 

Sovereign gold bonds
 

In SGBs, besides capital gain (or loss, depending on gold’s price movement), investors also earn an annual coupon of 2.5 per cent. Ranu says, “The Reserve Bank of India (RBI) launches a new series every month. Investors need to buy the equivalent of one gram at the minimum. They don’t have to bear any additional cost, apart from the purchase cost.”
 

SGBs can also be offered as collateral for taking a loan.
 

Long-term investors get a tax benefit. “The capital gain becomes exempt from taxation if an investor holds SGBs for the entire tenor of eight years,” says Rishad Manekia, founder and managing director, Kairos Capital.
 

One issue with SGBs is that they are low on liquidity. Investors can redeem them prematurely only uponthe completion of five years (on the date of interest payout). And while they are listed on the exchanges, liquidity tends to be relatively low there, so they may have to exit at a discount if they sell on theexchanges.
 

Investors with long horizons should opt for SGBs. Dilshad Billimoria, board member, Association ofRegistered Investment Advisors (ARIA), says, “It is perfect for investors having a low risk appetite.” 

Gold ETFs

Investors who don’t want to lock in their money for the long term should opt for gold ETFs instead ofSGBs. Liquidity tends to be good in them, especially those that have higher assets under management. “They are safe and secure and investors get the benefit of the strict regulatory oversight of the mutual fund eco-system,” says Vikram Dhawan, head commodities and fund manager, Nippon India Mutual Fund.
 

Gold ETFs can be bought in small quantities. They have no lock-in. Investors don’t have to bear any storage cost. Their ETF units are stored in demat accounts (the fund house bears the cost of storing theunderlying gold in vaults). However, investors have to pay an expense ratio that ranges between 1 and 2.5 per cent.
 

Shrestha says, “Select a gold ETF that has good volume on the exchanges and a low expense ratio.”
 

Gold bars and coins
 

Some portion of your gold investment can be in the physical form to take care of extreme scenarios, such as closure of financial markets. In that case, you will still be able to liquidate physical gold.
 

The best way to invest in physical gold is via gold bars or coins. Ranu says, "These come at a premium ofup to 10 per cent.” However, the premium is likely to be lower than what you would pay on gold jewellery. At the time of liquidating bars and coins, you may have to pay a melting fee to the jeweller.
 

Avoid buying jewellery for investment purposes, depending on the intricacy of the design, gold jewellery comes with a steep making charge, which is deducted at the time of sale.