Sheen is back with rise in gold prices, but pay heed to cost and liquidity

After scaling a high of Rs 55,922 per 10 gram on August 7 last year, gold retreated in the second half of 2020-21. It fell as low as Rs 43,994 by March 31 this year. Since then, it has recovered lost ground and is currently trading at Rs 48,615 per 10 gram.

Investors seeking to benefit from this uptrend need to understand the pros and cons of the various investment options available to them: Bullion, gold exchange-traded funds (ETFs), sovereign gold bonds (SGBs), and digital gold.

Physical ownership

Due to their fascination with physical gold, Indians buy bars and coins as investment. If they do so, they should consider the purity. The product should be hallmarked. If purchased online, it should be delivered in a tamper-proof packaging. 

“While physical gold offers the touch-and-feel advantage, purity and storage are concerns. Also, the minimum investment value is around Rs 5,000 for 1 gram,” says Navneet Damani, vice-president–commodity research, Motilal Oswal Financial Services.

The making charges for gold coins can range between 2 per cent and 10 per cent of the price of gold. Making charges for bars work out to be lower (less than 1 per cent) for larger pieces.

The mutual-fund route

Gold ETFs and gold savings funds offered by mutual fund houses are more convenient and cost-efficient. Units of gold ETFs track gold prices. Investors need a demat account to invest in them. 

Go with an ETF that records high trading volumes and has high assets under management as it is likely to show lower deviation between the price and the net asset value (NAV). The expense ratio of gold ETFs ranges between 0.35 per cent and 0.82 per cent (average 0.6 per cent).

“ETFs are convenient when buying gold in small denominations. Entry and exit are easy, and the investor does not have to endure the hassle of storage,” says Damani.

Gold funds, which are fund of funds that invest in gold ETFs, are used by those who don’t have a demat account, or want to do systematic investment plans (possible only in funds, not ETFs). 

Investors can sell them anytime to the fund house at the NAV (without worrying about any deviation between price and NAV, as it happens with ETFs).

The expense ratio of gold funds (direct) ranges between 0.04 per cent and 0.26 per cent (average 0.14 per cent). The regular plans cost 0.21-0.67 per cent (average 0.52 per cent).  

Earn interest from SGBs

These bonds are offered by the Reserve Bank of India on behalf of the government. Their total tenure is eight years, but investors can surrender them after five years on the date of interest payment.

A fresh tranche of these bonds opened for subscription on May 24. Those who fail to invest during the subscription period can buy them from the stock exchanges where they are listed.

“For investors with a long-term horizon, SGBs are attractive due to the coupon of 2.5 per cent per year on the invested amount. They are also exempt from capital gains tax if held till maturity,” says Vinit Pagaria, head of data and research, StockEdge.

It is advisable to invest in SGBs only if you can stay invested for or at least five years. While you can exit by selling on the stock exchanges, liquidity tends to be low there, and you may be forced to sell at a discount. 

Use SGBs for your long-term allocation to gold and gold ETFs for your shorter-term allocation, where you require liquidity.