If you are planning to buy or invest in gold this Diwali, here are some smart tips to help you get the investment right.
Check the authenticity and purity of physical gold
If you are planning to buy gold jewellery, remember that hallmarking is mandatory for purity levels of 24 carats, 23 carats, 22, 20, 18 and 14 carats. “One should bear in mind the BIS (Bureau of Indian Standards) mark which is a sign of the hallmark indicating purity and the fineness number,” says Colin Shah, MD, Kama Jewelry. “The gold jewellery must be assessed to check its purity in order to put the BIS logo on it. Keep an eye out for the jeweller’s ‘s mark as it indicates where the gold is purchased from. The BIS’s website has a list of certified jewellers.”
If you are buying bullion gold, you need to be very sure about the credibility and reputation of the seller, as hallmarking is not mandatory in this category. To be certain about the quality of gold, insist on a bill for the purchase. Remember that an authentic bill will include GST at the rate of 3%.
Keep physical gold exposure under a limit
While no virtual gold product can replace the feel and emotional appeal of physical gold, owning only physical gold may not be a prudent idea, especially if you are buying gold for investment.
There are many drawbacks of investing in physical gold. “One should weigh the merits between physical gold and paper gold. Physical gold, like coins, bars, jewellery, has the tangible benefit of direct ownership, but it also comes with challenges related to security and storage,” says Tarun Birani, Founder and CEO of TBNG Capital Advisors.
If you are buying jewellery, you will have to pay more on account of impurity and making charges. You may not be able to make up for this payment when you wish to liquidate or exchange the jewellery.
Another big concern with physical gold is safety. Storing it in a bank locker or protecting it through an insurance policy means paying an annual cost for safekeeping the gold. Therefore, it is better to keep gold in the physical form only up to the extent you need for regular use.
Choose the right product for digital gold exposure
Investors now have a variety of virtual gold investment options. You can now invest through digital gold, gold exchange traded funds (ETFs), gold mutual funds and sovereign gold bonds.
However, not all options work the same way. You must figure out which digital route works the best for you.
Many jewellers give a systematic investment plan (SIP) option. This gold investment can be redeemed any time or after maturity by converting the holding into physical gold. However, make sure there is no sustainability risk with the jeweller. To avoid any last-minute surprises, you must go through the terms and conditions of the investment option.
Other virtual options to invest in gold may work better. “Paper gold — such as ETFs, mutual funds and sovereign gold bonds (SGBs) — offers ease of trading and doesn’t require storage. Sovereign bonds can even accrue periodic interest, making it an attractive alternative for pure investment purposes. To add to that, SGBs have tax advantages too if held till maturity,” says Birani.
If you are not sure about the tenure of your investment and may need money midway, gold ETFs and gold mutual funds could be better options. However, if you are ready to lock in your fund for a long term, there is no better option than SGBs. “For investment purposes, a sovereign gold bond is the best as there is no capital gain on redemption of SGB. Further, it also gives interest of 2.5% p.a.,” says Surendra Mehta, National Secretary of the India Bullion and Jewellers Association (IBJA).
The additional interest under SGB makes it best gold investment option if you can lock in funds for long term. The first tranche of SGB is soon to mature and going by the current gold prices, it is likely to deliver a CAGR of 10.88% in the 8 year period besides the semi annual payout with interest rate of 2.75% taking total return to well over 13%. While the additional return offered on SGB has come down slightly to 2.5% however it is still an attractive bonus over gold price appreciation.
Avoid going for bulk investment in gold
Too much of a good thing is not considered good. This applies to investing also. Even when gold is a good investment, avoid buying too much of it at one go. This is because gold is known for uneven price volatility. “The investment approach towards gold benefits from recognising its cyclical behaviour, with periods of rapid growth often followed by corrections,” says Birani.
Given the volatile nature of gold in the short run and good returns in the long run, it is better to invest in gold in tranches. “Gold purchase should always be staggered and not in bulk, to take advantage of average pricing,” says Shah. If you invest all your money into gold at once and there is a significant correction a few days later, your entire investment will lose value. However, if you invest in tranches, you can always buy more when there is a correction. Even when you have a large sum to invest in gold, it is better to go for staggered investment.
Gold is considered a very good hedge against inflation and other asset classes. Experts advise keeping gold in the portfolio for hedging and diversification. “Over the last decade, gold has yielded an average return of approximately 6-7%, reflecting its role of hedging inflation and providing low correlation vis-à-vis other asset classes, amidst fluctuating market conditions. Thus, a staggered approach can help, but one needs to be mindful of where we are in the cycle as well by taking into account the other factors discussed earlier,” says Birani.
Going for a SIP or buying gold in a limited quantity each month can be a good approach for a staggered investment. Doing this investment annually on Dhanteras or Diwali can also be a good route for the long term.
Know the income tax implication of gold investment
Profit earned on selling gold you have been holding for more than 36 months is called long-term capital gains (LTCG). Profit on a sale before that period is called short-term capital gains (STCG). According to the Income Tax Act, you have to pay a tax of 20% and a cess of 4% on long-term capital gains from selling gold. This means the effective tax rate on gold is 20.8% if you sell it after holding it for 3 years or more. However, this rate does not apply to short-term capital gains. In the case of STCG, the tax is based on your income bracket. When it comes to paper gold, the rule does not change. So effectively one needs to pay short-term capital gain tax according to one’s income tax slab and long-term capital gain tax at 20.8%.