With the wedding season in full swing, consumers are busy shopping for gold. Buying gold is not only considered auspicious but is also believed to bring financial security. Even as historically gold prices perk up during the wedding season, prices of the yellow metal have remained flat to negative in recent months on account of easing of volatility in equity and debt market. Analysts advise that 10-15 per cent of your portfolio should be invested in gold depending upon your age. So should you invest in gold now or not?
Here are the key aspects that you should note while making investments in gold:
Gold provides diversification benefit
Gold is unlikely to be an attractive investment when the equity and the debt markets are in fine conditions, said Raghvendra Nath (CFA), MD, Ladderup Wealth Management.
Dinesh Rohira, CEO and Founder at 5nance.com seconds Mr Nath.
“Seeing the current volatility in the equity market, it is a good time to invest in gold as it provides good hedging on account. A weak global sentiment, especially in the US market, is expected to have a cascading effect on emerging markets….This makes gold investment an ideal asset class to diversify portfolio,” he said.
How much gold should you have in the investment portfolio?
Gold investment should be considered only from diversification perspective, and not for returns purpose, say experts.
“Portfolio diversification depends upon two major factors: one’s goal and risk appetite. An investor between 25 and 35 years of age should normally maintain 10 per cent in gold. People above this age bracket should invest 10 per cent- 15 per cent in gold,” said Brijesh Parnami, Executive Director and CEO, Essel Finance Wealth Services.
In fact, experts warn that gold investments can even provide negative returns.
“Gold is infamous for spending long periods of time doing nothing and sometimes even gives negative returns when equity markets are doing very well. The yellow metal has the ability to provide refuge at a time when there is pandemonium. So, a moderate exposure in gold is optimal,” said Anil Rego, Founder and CEO, Right Horizons.
Physical, e-gold or paper gold?
There are several gold investment options available in the market. The traditional gold investment mode is purchasing of physical gold. However, analysts suggest going for electronic gold.
“With physical gold, people generally have to pay for associated charges as well like the Goods and Services Tax (GST). Hence, compared to physical gold, electronic gold or e-gold is a better option. E-gold provides benefits like flexibility of buying,” said Sudeesh Nambiath, Head, India Gold Policy Centre (IGPC).
E-gold enables investors to invest their funds into gold in smaller denomination and hold it in demat form.
Gold schemes backed by government can also be considered.
“One can even invest in government-launched schemes like Gold Monetization Scheme, Gold Sovereign Bond Scheme and the Indian Gold Coin Scheme. These schemes provide an extra earning option for investors in the form of interest,” added Mr Nambiath.
“Such bonds help in earning an annual interest of 2.5 per cent, in addition to getting their market price at the time of sale. Plus, there is no cost involved for its storage, and investors are not charged any sort of capital gains tax on holding the bond till maturity,” said Rachit Chawla, Founder and CEO, Finway. A capital gains tax is levied on capital gains or profits from the sale of specific types of assets.
Gold exchange-traded funds (ETF) are ideal for investors who do not like the hassles and costs of storing and safeguarding physical gold. They are similar to mutual funds and carry a nominal fee.
“As the unit price (of SGB) closely resembles price of gold in the market – an investor can easily encash his holding by selling his units on the stock exchange. Thus the fund offers an ideal way to invest in gold. The value is stored electronically and also provides safety. Further, it can be invested partially with as low as Rs 1,000 a month,” explained Mr Nambiath.
Tax implications of investing in gold and gold-based instruments
The tax levied on gold depends on the form of gold one invests in. A majority of citizens invests in physical form of gold, which attracts capital gains tax at the time of selling of the assets.
“While purchasing physical gold, three per cent GST is charged. Eight per cent GST is applicable as the making charge. While selling the asset, if it is sold within three years of purchase, then short-term capital gains (STCG) tax is levied and long-term capital gains (LTCG) tax is charged if gold is sold after three years of purchase,” said Mr Parnami. STCG and LTCG taxes differ according to the time for which an asset is held by the investor.
For taxation purposes, gold ETFs and mutual funds are treated similar to non-equity or debt mutual funds and they come under the purview of capital gains taxation rules.
“For short-term capital gain (i.e. investment period of 36 months or lower), the tax applicable is as per the tax bracket of an individual. Gold ETF and e-gold attract the same tax rate as that of physical gold at the time of redemption,” Vijay Kuppa, Co-Founder, Orowealth, said.
“Sovereign gold bonds earn interest for the buyer which is taxable and if one transfers it within its five-year lock-in period, then capital gains are taxed and at maturity, it is tax free,” he said.
For long-term capital gains, the tax applicable is 20 per cent for indexed funds and 10 per cent for non-indexed funds. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index.
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Source: NDTV Profit