GOLDEN OPPORTUNITY

There are many ways to invest in gold, but each of the available options comes with its share of benefits and pitfalls

There is something about gold that makes Indians chase the yellow metal. Although gold purchase is often tied to auspicious sentiments, it is often bought for its safehaven tag. Over the years, the debate over the financial benefit of buying gold has resulted in several ways through which one can invest in it other than buying it in physical form. There is financial prudence when investing in gold, unlike buying physical gold, which is fraught with risk of theft. As an investment, gold can act as a hedge against inflation and finds its way into the investment basket of many Indians as an asset class to invest.

Today, gold ETFs, gold mutual funds and the sovereign gold bonds are all financial instruments that provide investors with the choice of investing in gold. Given the need for gold in Indian families, especially at the time of weddings and other important festivals, gold has found itself as an asset class in which people invest for consumption more than gold as a hedge against inflation. For instance, instead of accumulating physical gold in the form of bars, coins or jewellery, financially savvy investors see the virtues of investing in paper gold (see Various Hues of Gold).

The safety of investments and regulated investment market for gold has made many investors see merit in investing in gold instead of physical ownership. As investments in gold can be done for smaller denominations, it makes purchasing gold affordable for many. Moreover, if one uses the principles of long-term investments with mutual fund to invest in gold ETFs, one can accumulate significant investments in gold, which could be converted to gold ornaments or jewellery when needed.

FINANCIAL ASSET Historically, it has been seen that gold protects purchasing power against inflation during challenging economic times. It tends to retain its value over the long term despite fluctuations. Although there may be a correlation between gold and inflation in the short term, the long term correlation between gold and inflation does not suggest much. The reason for this favourable relation is that during high inflation, fears of value loss brings more investments into safe havens like gold. Likewise, the high liquidity of gold makes it a go-to financial asset in tough economic times when some other asset classes may be less liquid.

As an investment instrument, gold doesn’t require expertise for people to commit to. The way gold is perceived and valued makes

one thing clear—it is a valuable asset to own. One does not need to evaluate much with gold, you can pick from any of the financial forms of gold such as gold ETFs, gold mutual funds or even the SGB. All these avenues to invest in gold have made it more accessible as a financial instrument. Portfolios that follow asset allocation place gold with up to 10 per cent allocation, which has worked favourably for portfolio returns over the years.

No doubt, physical gold has its unique place, but gold as a financial instrument has its own advantage of safety. There are also no liquidity concerns when investing in gold as these are investments that can be redeemed for cash at any time. The aspect to explore when investing in gold is the way the gains are taxed on these instruments. Capital gains taxation rules are applicable in the case of physical gold, Gold ETFs and Gold Mutual Funds. Depending on the holding period of your investment, the time period between purchase and sale of your investments, either Short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG) rules may come into play.

If the holding period of these investments prior to redemption or sale is up to three years or shorter, the gains are classified as STCG. In this case, the gains will be added to your taxable income for the applicable financial year and taxed as per the income tax slab rate. In case you have held your gold investment for over three years prior to the sale/ redemption, LTCG rules are applicable. Currently, LTCG on physical gold, Gold ETFs, and Gold Mutual Funds is calculated at 20 per cent of capital gains with indexation benefit.

But the taxation of SGBs is different. One needs to consider the tax on the interest earned, which is completely taxable as it is added to your taxable income for the relevant financial year and taxed according to the applicable slab rate. In case of early redemption after five years, the gains are completely tax-free. The Reserve Bank of India typically offers redemption windows every six months after completion of the five-year lock-in that can be utilised for completing the premature encashment. In case you hold the SGB till maturity, the gains from the investment are again tax-free.

However, if you sell the SGB through the secondary market, you will be taxed according to capital gains taxation. So, make sure that you do not lose out on the gains that your gold investments make by not being aware of the taxation on gains. Invest smartly in gold and do so through financial instruments as they provide more flexibility than gold in physical form. ■