By Sunil Dhawan | ECONOMICTIMES.COM | Jul 20, 2016, 02.53 PM IST
Gold in its physical form — jewellery or ornaments — has always been popular among Indians, especially women. Unlike in the past when gold was only considered a hedge against inflation and held entirely in physical form, today it finds its place even in an investor’s portfolio and largely as paper gold. Earlier as gold exchange traded funds (Gold ETFs) and now as Sovereign Gold Bonds (SGBs), paper gold offers many advantages to Indian investors now.
The Series I of SGB 2016-17 is currently open for subscription from July 18 to 22. The fourth tranche of SGB, its price has been fixed at Rs 3,119 per gram.
However, before you buy SGBs, you need to be clear about why you need to invest in gold. Is it to meet a financial goal or for pure investment purposes? If it is for the former, then most financial planners will suggest not having more than 10 per cent of the total portfolio in gold. Aniruddha Bose, Director & Business Head, FinEdge Advisory, says, “In our view, investors shouldn’t overexpose themselves to SGBs. They may form 5-10 per cent of the overall asset allocation of an investor.”
Window of opportunity
The bonds will not be available all year round. The government will keep coming out with primary issue of different tranches of SGBs for open purchase. This could typically happen every 2-3 months and the window will remain open for about a week. For investors looking to purchase SGBs between two such primary issues, the only way out is to buy earlier issues (at market value) which are listed in the secondary market.
The biggest advantage of SGBs is clearly on the tax front. The 2016-17 Budget had proposed that the redemption of the bonds by an individual be exempt from the capital gains tax. Therefore, holding till maturity has its tax advantage. Redeeming in stock exchange may, however, result in capital gains or loss and one may have to pay tax accordingly. Interest on the bonds is, however, fully taxable as per the tax rate of an investor. For someone in the 10, 20, or 30 per cent tax bracket, the post-tax return comes to 2.47, 2.18 and 1.9 per cent respectively.
The initial cost of owning physical gold in the form of bars, coins is around 10 per cent and even higher for jewellery. SGBs and Gold ETFs are cost-effective as there is no entry cost in either. In the latter, the expense ratio could be around 1 per cent. Still, owning gold in paper form is cost-effective than owning physical gold.
The returns from gold can be highly volatile, especially over the short term. Therefore, link a long term goal to your gold investments. Goals that are at least 7-8 years away are ideal as SGBs mature after 8 years. The investor could be given an option to roll over his holdings for an additional period. However, one may withdraw prematurely five years from the issue date on interest payment dates. Although one can exit in the secondary market anytime, the liquidity and price risk may exist. There may not be enough buyers for the quantity offered by you and even the market price may be low. These are the concerns when one wants to exit from an investment in a hurry. Goals such a children’s education, marriage, or your own retirement, which are eight years away or more, may be linked to investment in SGBs.
Identify a long term goal and estimate its inflated cost. Calculate the amount you need to save towards it. Similarly, find out the investment required towards other long term goals. Earmark not more than 10 per cent of the total monthly investments towards all your long term goals into SGBs. Bose says, “From a financial planning standpoint, it makes sense to take a larger exposure to more aggressive assets such as equities (as opposed to gold) for the fulfilment of long term goals.”
Treat investment in every tranche (primary issue by government) of SGBs as SIP. Alternatively, Bose suggests, “SGBs are actively traded on the exchanges, so one could always buy more of them at a later stage, from a portfolio balance standpoint.” But remember, not to invest in them when the linked-goal remains 2-3 years away. Let the existing investments in SGBs continue and make sure to redeem them at least a year before the goal to ensure the volatility in gold portfolio is minimal.
Returns in SGBs are market-linked and will depend on gold prices prevalent on maturity after eight years. “Buy SGBs keeping your overall asset allocation in mind, rather than just buying them blindly. Also, understand the risks – gold prices have already gone up sharply in the past year,” says Bose.
Rather than owning gold in physical form and not earning anything on it, SGBs mean owning gold and also earning interest on it. The government has fixed interest of 2.75 per cent per annum on the investment, with no compounding of interest. The interest shall be paid in half-yearly rests and the last one shall be payable on maturity along with the principal.
It will also be important to re-invest the half-yearly interest as the amount could be low and used up unnecessary. To put the interest amount in perspective, on an investment of Rs 1 lakh, Rs 2,750 received yearly yields Rs 22,000 after 8 years.
Gold ETFs provide much better liquidity than SGBs. Owning units is much easier than SGBs as it’s entirely online in the case of ETFs. The risk of owning and holding doesn’t exist in both. The only disadvantage of ETFs is that it won’t help you earn the additional interest of around 2 per cent per annum. So depending on how comfortable you are managing your investments online, choose either ETFs or SGBs.
Source : http://goo.gl/xBb4pN
These investments can’t be pledged to secure loans. However, this doesn’t make them unattractive
Vivina Vishwanathan |First Published: Wed, May 29 2013. 07 37 PM IST| Live Mint|
On Monday, the Reserve Bank of India (RBI) issued guidelines barring banks from giving loans against units of gold exchange-traded funds (ETFs) and gold mutual funds (MFs).
In a separate circular, RBI stated that non-banking finance companies (NBFCs) are banned from giving loans against bullion or primary gold and gold coins. RBI clarified that NBFCs should not give loans for purchase of gold in any form, including primary gold, gold bullion, gold jewelry, gold coins, units of gold ETFs and units of gold MFs.
For banks, RBI also restricted loans against gold coins per customer to gold coins weighing up to 50g. Banks and NBFCs can give loans against gold ornaments and jewelry.
The new guidelines
Gold ETFs and gold MFs are backed by bullion or primary gold. RBI has been against the practice of giving loans against gold bullion. Now, RBI has clarified that considering the underlying product is bullion or primary gold, the restriction on grant of loan against “gold bullion” will be applicable on gold ETFs and units of gold MFs as well. Says R.K. Bansal, executive director, IDBI Bank Ltd, “RBI was always against the practice of giving loan against bullion or primary gold. They are saying the same thing again.”
In case of gold coins, RBI states that banks are allowed to give loans only against specially minted gold coins sold by banks as they may not be in the nature of “bullion” or “primary gold”. However, RBI states that there is a risk that some of these coins would be weighing much more, which can go against RBI’s guidelines of restriction on grant of advance against gold bullion. So, if a bank is giving loan against gold coins, banks should ensure that the weight of the coins does not exceed 50g.
What is the practice?
Two of the listed gold loan firms have denied giving loans against gold ETFs and gold MFs to its customers. Says George Alexander Muthoot, managing director, Muthoot Finance Ltd and president, Association of Gold Loan Companies (India), “We don’t have a single customer who has taken loan against gold ETFs or gold MFs.”
Adds I. Unnikrishnan, executive director and deputy chief executive, Manappuram Finance Ltd, “Loan against gold ETFs or gold MFs was never a popular product and this ban is not going to have any impact on the business of financial institutions.”
What should you do
You can no more pledge gold ETFs and gold MFs in case you need a loan. However, this doesn’t mean that you should stay away from these products. Says Suresh Sadagoppan, a Mumbai-based financial planner, “The best way to buy gold for investment purpose is in paper form such as gold ETF and gold MF.” As RBI has put a cap of 50g on gold coins, again your option of pledging gold comes down further.