YOUR MONEY: INVEST IN GOLD VIA SOVEREIGN BONDS
These bonds score over other options as they pay interest and are tax-free at maturity. But they require long-term commitment
Last year, if you had bought gold on Akshaya Tritiya, a popular festival when it is considered auspicious to buy the yellow metal, you would be sitting on a loss of 3.6 per cent as of April 27.
Nonetheless, market experts are currently bullish on the yellow metal. "Despite the Federal Reserve’s interest rate hike, real interest rates will remain negative. Also, the rise of populism in Europe (read Brexit) will keep investors interested in gold. The current drop in prices is a good opportunity to buy," says Chirag Sheth, research consultant, South Asia, Metals Focus.
Buying interest in gold on Akshaya Tritiya has been consistent. In the past few years, around 15-25 tonnes have been bought on this day. According to GFMS Thomson Reuters estimates, 17 tonnes were purchased by Indians on Akshaya Tritiya last year. At current market prices, this translates into ~5,000 crore. Market experts expect even higher demand for gold this time — more than a billion dollars’ worth of sales.
Different investors buy gold for different reasons. Some buy it as a hedge against inflation and others accumulate it for marriage in the family in the future. In rural India, people trust gold more than other financial assets. Financial planners, however, advise that allocation to the yellow metal should not exceed 10 per cent in one’s portfolio. For investors, the best strategy is to buy gold in tranches.
Sovereign gold bonds, which the government introduced a couple of years earlier, are today the best instrument for investing in gold. These bonds pay an interest of 2.5 per cent on the first year’s price. Since they can be kept in dematerialised form, they don’t require payment of making charges or valueadded tax, as happens when you purchase physical gold. These bonds are also listed on the stock exchanges. Holders of these bonds get cash equivalent at the time of maturity eight years later, which is tax-free. These bonds can be bought from banks, online bank accounts, post offices, and so on. Says financial planner Gaurav Mashruwala: “Sovereign gold bond is the best option for investing in gold. The government offers a discount on the price at the time of purchase. Investors also earn an annual interest. However, before you decide to buy, you must be clear about your intentions. If you wish to invest small amounts every month for investment purpose, you may still consider gold exchangetraded funds (ETFs) or fund-of-funds (FoF).”
When compared to sovereign bonds, buying ETFs or FoFs offered by mutual funds has a few disadvantages. Gold ETFs don't pay an interest. Investors also have to pay an annual charge called expense ratio.
If you are buying physical gold, look for the following features: 999.9 has the highest purity but not all jewellers sell it. Standard 999 purity gold per 1 gram, according to India Bullion and Jewellers Association’s (IBJA’s) opening price (on Tuesday), was ~2,922 while standard 995 purity gold price was ~2,907. The 22 carat or 916 purity gold, which is used for jewellery making, costs ~2,677 per g. So, check the purity and match prices and decide how much you are paying and whether it is worth what you are getting.
Mashruwala recommends people should buy coins from places that also buy them back when you wish to encash your gold holdings. Do keep the bill which will come in handy at the time of sale.