Investors must introduce gold to their portfolio smartly to lower their charges and taxes and to maximise returns
Gold is rallying again, and we've seen it scale record highs in 2019. The precious yellow metal, which has been the traditional investment of Indians for millennia, surpassed Rs. 40,000 for the first time recently. Smart investors must be wondering how to cash in on this rally. Will the rally continue? Is there a quick buck to be made? How should first-time investors react? Investing in gold is tricky, and there should be a few things you must always keep in mind.
Consider gold's historic performance
It's during economic uncertainty that we see gold rally. Between 2007 and 2012, the price of 10 grams of 24 karat gold tripled to around Rs 30,000. Then, till around 2018, it largely remained flat, barring occasional spikes and dips. But it wasn't till 2019 that it took off again, growing nearly by a third — from around Rs 31,000 in January, to Rs 40,000 in some parts of India before correcting to below that mark this week. Therefore, anyone who's bought gold at peak prices has already suffered a short-term loss. Investors buy gold to guard against against inflation and economic uncertainty. This year, the returns from equity, fixed income instruments such as fixed deposits, and bonds have been low, while gold has emerged as the go-to option. However, buying gold also means having to deal with lengthy periods where the investment does not grow or grows negatively. For example, investors who had bought gold at the end of the 2011-12 rally would have had to wait till 2019 for any return on investment.
TRICKY SITUATION
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- This year, the returns from equity, fixed income instruments such as fixed deposits, and bonds have been low, while gold has emerged as the go-to option
- For small investors, one of the best ways to buy gold is to accumulate it slowly in small quantities, especially during price corrections
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How much and when to buy
It's almost always a bad idea to buy any asset at peak prices. It would be especially bad to make bulk purchases at peak prices. You run the risk of short-term losses immediately and may have to wait a long time to book gains. Therefore, for small investors, one of the best ways to buy gold is to accumulate it slowly in small quantities, especially during price corrections. How much gold should you own? The thumb rule is that gold should form 5% of your investment portfolio. Too much of gold may slow down the overall growth of your wealth. Too little, and you may not benefit from it during an economic crisis.
How to buy
When you're buying gold, you must ask yourself what it is for. If it's for personal consumption as jewellery or artefacts, you need not bother too much about returns. But if it's for investment, you must consider the additional costs, too. Gold purchase attract 3% GST. There's also 5% GST on making charges, which are sometimes higher on jewellery than coins and bars. The making charge itself may be 8% and upwards. With gold as an investment, the added costs impede your margins. In this regard, gold coins and bars serve as better investments due to lower charges.
Alternatives to physical gold
As a gold investor, you need not restrict yourself to physical gold. In fact, in many cases, dematerialised gold is a far better option. You have multiple ways to buy demat gold, each with its own set of pros and cons. The biggest advantage of owning demat gold is not having to worry about safe storage or purity. You could invest in the government-backed Sovereign Gold Bond, whose new tranche launched on September 9 and can be bought from authorised banks or online platforms, or from stock exchanges. The SGB not only provides the opportunity of capital gains via appreciation of gold prices but also provides a guaranteed interest income, which is 2.5% per annum semi-annually for the new tranche. Next, you have the option of buying gold ETFs and gold mutual funds, marketed by many fund houses. These also allow you to invest in demat gold. Your investment charges will be in the form of the total expense ratio ranging from 0.06% to 1% in most cases. Lastly, you could also buy demat gold from MMTC-PAMP through online trading platforms or payment apps such as Google Pay, by investing as little as Re 1 to buy micro-quantities.
Mind the taxes
Apart from the various GST slabs applicable on various forms of gold, you also have to pay taxes on capital gains made from the sale of gold assets. Firstly, SGB is the most tax-efficient form of gold investment because it is free of GST, and its maturity proceeds in eight years are 100% tax-free. This means that your absolute returns from SGB are much higher compared to any other form of gold bought at the same time. The sale of physical gold, ETFs and gold mutual funds will attract Short Term Capital Gains (at the rate of your income tax slab) where the investment tenure is less than three years, or a Long Term Capital Gains tax at the rate of 20% with indexation benefits where the investment tenure is longer than three years.
Gold is a volatile investment which does not guarantee returns. Hence, investors must introduce gold to their portfolio smartly to lower their charges and taxes and to maximise returns. It's also advisable to have a long-term investment horizon for best results.
The writer is CEO, BankBazaar.com
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