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BT Insight: All about gold ETFs, bonds and monetisation scheme

The government has experimented with multiple ways from gold ETFs, SGBs, gold mining funds, gold fund of funds (FoF) to digital gold.

Aprajita Sharma  New Delhi     Last Updated: May 30, 2019  | 15:02 IST
BT Insight: All about gold ETFs, bonds and monetisation scheme

Despite being in existence for many years, gold exchange-traded funds (ETFs) and sovereign gold bonds (SGBs) have failed to take off in a big way. Tepid performance of the gold in the past few years could be responsible for this but the fact remains that gold in India is not seen as just an investment avenue but holds an auspicious and emotional value.

The government has experimented with multiple ways from gold ETFs, SGBs, gold mining funds, gold fund of funds (FoF) to digital gold to reduce the domestic demand for physical gold, but the preference for the latter doesn't go away. It also launched gold monetisation scheme (GMS) for those who have gold lying in lockers and cupboards.

"Gold has always been considered a safe haven. The market in physical gold being extremely liquid, many people prefer using it. But investing in gold through financial instruments such as gold ETFs and gold bonds is more efficient and convenient for investors," says Vishal Jain, Head ETF, Reliance Nippon Life AMC.

Analysts believe gold as an asset class should constitute anywhere between 5-15 per cent of the total investment portfolio, depending on the macroeconomic outlook. "Amid geopolitical uncertainties, a higher end of the band can be considered for one or two-year time horizon. The ongoing financial year looks like one of those times," says Arvind Sahay, Chairperson, India Gold Policy Centre.

So, if you are not fond of physical gold, you may consider the following gold investment avenues:

Gold ETFs

Gold ETFs are dematerialised form of physical gold that tracks the bullion rate. These are traded on stock exchanges and can be bought and sold like company stock. Investors can buy as low as one unit of gold, which is equivalent to one gram.

Anyone considering investing in gold ETF should first look at such ETF's AUM (assets under management); the larger the AUM, the better, suggests Nitin Shanbhag, Senior Group Vice President - Investment Products, Motilal Oswal Private Wealth Management. Secondly, the performance deviation vis-a-vis actual gold prices in rupee (lower the deviation, the better) should be tracked, he adds. Liquidity, transaction cost, management fees, and tax benefits should also be kept in mind.

The tax structure of the gold ETF is similar to that of physical gold. If you sell gold ETF within three years, there will be a short-term capital gains tax based on your income tax slab, while 20 per cent long term capital gains (LTCG) tax with indexation i.e. adjusting for inflation on capital gains. That said, there appears to be no quantitative benefit for investors to invest in gold ETFs over physical gold other than convenience.

Jain suggests that gold ETFs should be taxed differently than physical gold. He recommends fixing one-year long-term capital gains (LTCG) on gold ETFs instead of the existing three years. "This will provide an incentive to investors to invest in gold through a financial instrument and thereby reducing dependence on physical gold," he says.

Alternatively, investors can invest in digital gold, gold mining funds and gold Fund of Funds (FoF). Gold FoF invests in the units of gold ETF and does not require a demat account. A few brokerages and fintech firms offer digital gold in partnership with MMTC.

Gold bonds

Launched in 2015, sovereign gold bonds are another substitute for physical gold. The Reserve Bank of India issues gold bonds on the government's behalf in the gap of 2-3 months. The bonds are denominated in multiples of gram(s) of gold with a basic unit of one gram. Investors in gold bonds, not only earn the appreciated value of gold but also 2.5 per cent interest rate per annum. Interest is paid semi-annually. The last interest payout is credited on maturity along with the principal. There is a lock-in period of five years on gold bonds while the maturity period is eight years. Gold bonds can be bought and sold on stock exchanges but liquidity is low.

Interest on the bonds is taxed as per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax on redemption of SGB is exempted if you hold it till maturity. If sold in the secondary market or after three years, capital gains on such transaction will be taxed at 20 per cent with indexation. There could be some marginal tax if sold before three years.

Gold monetisation scheme (GMS)

People generally keep gold at home or safeguard it in bank lockers by paying maintenance charges. GMS is like a gold savings account. It not only protects your gold from theft but also offers interest rates in the range of 0.5-2.5 per cent depending on the tenure of the deposit. The minimum deposit is 30 grams gold of any purity. There is no maximum limit.

You do not have to pay capital gains tax on the interest earned. The capital gains on value appreciation are also exempt from wealth tax and income tax.

Experience so far

There were only 12 gold ETF schemes as of April 2019 with the total number of investors being 3,19,863. April saw a net outflow of Rs 9.7 crore with total AUM standing at Rs 4,594 crore. Data show total AUM of gold ETFs has fallen by 60 per cent between 2013 and 2019.

However, Sahay of India Gold Policy Centre sees silver linings. "There may have been net outflows, but the rate of outflows has reduced. That said, the negative trend in gold ETFs seems to be reaching its trough," he says.

"Given impending risks in the global economy, gold ETFs have the potential to see net inflows in FY20 after six years," he adds.

Gold bonds have also failed to pique investor interest. The SGB was launched with an aim to garner an investment of Rs 15,000 crore a year. However, since launch, total AUM in SGB has only gone a little over Rs 6,000 crore. Low liquidity in the secondary market has made the cost of exit high, which deters many investors, points out Sahay. He advises investors to stay locked in till maturity.

Sahay further suggests linking gold ETFs with GMS. He points out if fund managers could design the gold ETFs in such a way that the gold held by investors in ETFs can be moved into GMS, they will be in a position to significantly reduce the management fees for investors. "It would be an excellent move creating a win-win for the investor, funds and the economy," he says.

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