There was a time when every Indian family had some amount of physical gold reserves kept for future marriages of children. These were mostly in the form of ancestral jewellery passed on from one generation to another. However, with the changing nature of market and better alternatives available, physical gold is not advised by any financial adviser these days.
There are a number of drawbacks of investing in physical gold in such a highly inflated and dynamic country like India.
What the Experts have to say
A financial adviser pointed out that “You not only lose value in making charges, but it has safety issues and involves high storage charges compared with bonds and ETF’s, which are stored in the DEMAT form. Purity is, of course, the biggest concern and you may not get the right price when you liquidate it.”
“Its fine if you want to gift gold jewellery at your child’s wedding, but I wouldn’t recommend investing in gold. For practical purposes, sovereign gold bonds are the best options” – Vipin Khandelwal, Founder of Unovest.
Bonds are a better investment because when we sell the bonds in the market, in addition to getting whatever the market price is, one can also earn returns of up to 2,5% per annum. This does not involve any costs for storage. If bonds are held till maturity then no Capital gains tax is levied upon it.
Lets compare Physical Gold with Gold ETF’s and Sovereign Gold Bonds one by one
The easiest way one can have their hands on gold is buy buying it from the market. The resale value is comparatively lower than that of the gold coin and gold biscuits. When buying physical gold, purity, becomes of the major concerns. The purer the gold is, the more expensive it gets. One should always check for standardized marks like the Hall Mark Sticker to validate the authenticity of the Gold. Gold should only be purchased during festivals and in smaller quantities. Gold as an investment option would not be a good idea considering the costs it incurs with itself.
Gold can also be bought from the exchanges in real time. This gives us the liberty to buy according to our budget of investment. You need to start investing by buying 1 gms of Gold. All the deposits and withdrawals will happen in the DEMAT account. An investor needs to pay an annual charge for the maintenance of the DEMAT account. The trading and selling charges are much lower than what we would incur while buying Physical Gold.
There is no physical delivery of any material done here. Whatever amount of gold we buy is just simply transferred to the DEMAT account.
Sovereign Gold Bond
The SGB are gold investment product recently launched by the government as an alternative to physical gold. These bonds are available in select post offices, designated banks and exchanges. There are two ways of holding bond, firstly, either in DEMAT Account electronically or in Paper format. The investments in Gold bonds are exempt to Capital Gains if the bonds are held till maturity. The bond even pays a 2.5% return on the invested amount.
SGB’s can be used as collateral security for taking loans. SGB’s are a good investment in a long rn as there are tax benefits as well as the interest income that the bond itself will generate.
Therfore, it is clearly established that buying physical gold for investment purposes in not a smart decision for a dynamic country like India.