When it comes to appetite for gold, very few can beat Indian households. As the world’s second-largest consumer, India imports more than 800 tonnes of gold every year, which is 90 per cent of its total supply. The country accounts for nearly 25 per cent of the global gold demand, next only to China. The yellow metal is so intrinsically tied to Indian culture that it sparkles in almost every celebration. Clearly, Indians are enamoured with its glitter. But one cannot ignore the hassles of buying and storing physical gold. For instance, gold jewellery’s purity is not easy to ascertain, nor are its high making charges conducive for investment. Above all, paying for a bank locker when you are investing seems counter-intuitive. This is where digital gold makes its case for a spot in your portfolio.
With digital gold, you don’t need to worry about its storage and purity. The underlying asset for these investment avenues is physical gold and you get returns according to its spot prices (minus charges). You can also convert digital gold into cash and buy jewellery without the hassle of deductions common with physical gold. Most importantly, you can invest smaller amounts, which is a huge attraction for investors who want to accumulate gold over a period of time.
Therefore, investment in digital gold makes sense—it’s easy to buy and hold. So, if you plan to invest, here are a few nifty ways to buy digital gold. And how will gold perform in 2022? Let’s take a look.
Returns on gold depend on three factors: international prices, rupee vs dollar exchange rate, and customs duty. Having said that, the gold outlook will depend on how the central banks plan to deal with high inflation rates. Moreover, geopolitical tensions and the Covid-19 pandemic, which earlier stoked fears of a recession, have started stabilising.
Recently, the dollar index surged due to rising global inflation, and economic and political turmoil. Amidst this, investors ditched gold for the dollar and US bonds, pulling its prices down and making it a good time to buy the yellow metal. It was trading at Rs 51,130 per 10 gm on May 31. “Although gold is seen as an inflation hedge, it is vulnerable to rising short-term US interest rates, which enhances the cost of holding zero-yield bullion,” says Saish Sandeep Sawant Dessai, Research Associate for base metals at Angel One, a stock broking firm.
“Gold is getting mixed triggers but the bias should be of upside. One must keep it in the portfolio as insurance due to ongoing uncertainty. ETFs (exchange-traded funds) and central bank buying have increased and likely to continue. Any pause in the equity market will give a boost to prices,” says Vandana Bharti, Assistant Vice President of commodity research at stock brokerage SMC Global.
How to invest?
Broadly, there are three ways to invest in digital gold:
Sovereign Gold Bonds: SGBs are government securities denominated in grams of gold, with 1 gm of gold equal to one unit of the bond. These bonds are pegged to spot gold prices, where one pays the issue price of a bond during subscription and it gets redeemed in cash on maturity. What makes SGBs popular is their income element. It offers an interest rate of 2.5 per cent per annum. Hence, if you buy SGBs worth Rs 1 lakh, you will receive interest of around Rs 2,500 every year. Then, at the time of maturity, an amount equal to the gold’s value at market prices is also returned to you. The important point to note here is that while gold prices may vary at the time of maturity, the units of gold that you hold remain the same.
The issue price of an SGB is decided on the basis of the average closing price for the last three working days of the week preceding the subscription period, and the price of 999 purity gold is considered. Those applying online and paying digitally get a discount of Rs 50 per bond.
You can buy a minimum of 1 gm and a maximum of 4 kg of gold per annum through SGBs. The bonds, which mature in eight years, can also be used as collateral for a loan. However, they have an exit option in the fifth, sixth and seventh years on the interest payment dates.
SGBs have an advantage over other digital gold options due to their tax treatment. The interest earned from SGBs is taxed as income from other sources while TDS is not deducted. More importantly, there is no tax on redemptions after maturity. However, if they are redeemed after the lock-in period of five years and before the maturity period, profits are taxed at 20 per cent with indexation benefit as long-term capital gains (LTCG). If one does not avail the indexation benefit—used to adjust the cost of buying against inflation—then a 10 per cent tax is levied.
Gold ETFs: Unlike SGBs, ETFs are backed by physical gold, which is stored in the vaults of custodian banks. The value of each unit of ETF depends on how the asset management company decides to allot the value of 1 gm of gold to each unit. But one must remember that there is a tracking error while buying a gold ETF. It means, the value of the ETF does not mirror spot gold prices due to the expenses charged on it, such as transaction fees and the cash held by the ETFs to make investments or distribute payouts.
The tax treatment for gold ETFs is similar to a debt fund. If sold after three years, they are taxed as LTCG at 20 per cent post indexation. If sold before three years, then it is taxed according to your income slab as short-term capital gains.
Gold funds: For those who don’t have a demat account but still want to invest in digital gold, gold funds are the best option. These funds invest in gold ETFs and are offered by mutual funds, where net asset values are declared daily at the end of trading. However, you spend more when investing in gold funds because you have to pay the cost of managing both gold funds and their ETFs. Taxation is also similar to gold ETFs.
“The simplest way to invest in gold is through MFs. Those who have demat accounts, they should invest through ETFs. If you have a long-term perspective, you could invest in SGBs, which have tenures of eight years,” says Lovaii Navlakhi, Managing Director and CEO of International Money Matters, a registered investment advisory firm.
How much to invest?
Experts advise people to invest 5-10 per cent of their portfolio in gold. According to them, gold is a good hedge against the uncertainties of the equity market. “We recommend that gold always form a part of client portfolios to the extent of 3-5 per cent of net worth and can increase to a maximum of 10 per cent during uncertain times. Build the portfolio through staggering investments in the next four to six weeks,” says Navlakhi.
Investment in gold is good from a diversification perspective. But investments in physical gold are liable to be charged in the form of deductions when you sell them.
“You should look at gold from an asset allocation perspective where it can hedge against inflation and equity. Usually, you can consider an allocation of 5 per cent. In present times, it is better to invest gradually,” says Harshad Chetanwala, Co-founder of MyWealthGrowth.com.
Just like an SIP, you can invest as little as one rupee in digital gold through companies like MMTC-PAMP and SafeGold and their mobile-wallet distribution partners. After accumulating the minimum units, you can either sell it at prevailing rates or get the equivalent physical gold home delivered. However, unlike SGBs, gold ETFs and gold funds, digital gold is unregulated and does not fall under the ambit of RBI or Sebi regulations.
Before venturing into investments in gold, one should understand the risks carefully. “The question to ask is whether you need that exotic product and if so, the why of it. That in itself might keep you safe,” says Navlakhi.
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