Dhanteras 2024: Planning to invest in gold? Here’s what you need to know

Dhanteras, one of the most auspicious occasions to buy gold, sees people visiting jewellery stores in large numbers and making gold purchases. Gold's enduring value and resilience during economic uncertainty make it a preferable choice for investors. "Gold is seen as a hedge against dollar weakness. Given recent trends, it is always a good idea to have a small allocation to this asset class," says Kavitha Menon, a SEBI-registered investment advisor and founder of Probitus Wealth.

While physical gold (jewellery, coins, etc.) was for long the only way to invest in this precious metal, many other financial instruments have now come up through which one can own gold assets to diversify their portfolio. Menon informs, "Traditionally, gold was always held in the form of jewellery by Indian families. The purpose was always to create a safety net to tide over any adversities. Now, families can achieve the same purpose by buying tax-efficient and cost-efficient gold via Sovereign Gold Bonds (SGBs) and funds."

"Advisors use paper gold to seamlessly achieve asset allocation goals of their clients. In fact, gold finds its way in multi-asset funds as well. These funds hold gold ETFs (Exchange Traded Funds) as part of their gold allocation," she adds.

Given the range of gold investment options available and a lack of awareness about the same among the larger population, mid-day.com speaks to Menon and Vishal Jain, CEO, Zerodha Fund House, who help break it down.

What are various ways in which one can invest in gold?

Menon: There are two broad categories:

• One can buy jewellery or gold coins and bars. These are traditional ways of owning gold.
• Investors can own gold in paper form by buying gold ETFs, gold funds or SGBs.

What are SGBs?

Menon: SGBs are government-issued fixed maturity bonds that have gold as the underlying asset. Here, the price of the bond tracks gold prices, while the government also offers interest at 2.5 per cent.

Jain: SGBs are government-backed securities, measured in grams of gold and issued as an alternative to owning the metal directly. They offer a secure way to invest in gold while earning interest, eliminating the costs and risks associated with storing physical gold.

What are Gold ETFs?

Menon: Gold ETFs are market-listed mutual funds that own gold as an underlying asset. They can be purchased from the market like any other stock. One needs to have a demat and trading account to buy gold ETFs. For investors who don't have a demat account, gold funds of ETFs are a good alternative. This fund of funds (FOF) can be purchased like any other regular mutual fund.

Gold ETFs offer a lot more liquidity as compared to SGBs and may be invested in by those who have an investment time frame of less than 5 years.

Jain: As volumes are thin in the secondary market for SGBs, an alternative option is to invest in Gold ETFs which have been around for over 15 years now. Gold ETFs are regulated products that can be bought and sold real-time on the exchanges, are low-cost, transparent, liquid, and are available in small denominations of even 1 unit. One could look at the Indicative Net Asset Value published on stock exchanges or AMC websites for reference.

On the other hand, Gold FoFs can be invested just like any other mutual fund unit without the necessity of a demat account, and one could easily do SIPs through gold FOFs. Thus, depending on individual use cases, one could look at which avenue is most suitable.

What are the tax rules for these gold instruments?

Menon: The most tax-efficient are SGBs, as the capital gains on gold are tax exempt after five years. The interest of 2.5 per cent is however taxable at slab rates.

Gold ETFs and gold funds are taxed at slab in the short term and at 12.5 per cent in the long term. Physical gold is also taxed at 12.5 per cent for long term gains.

Jain: From a taxation perspective, Gold ETFs, as they are listed, have a STCG (short term capital gain) period of 1 year, taxed at the investor's slab rate and beyond that as LTCG (long term capital gain) of 12.5 per cent. Physical gold, digital gold and gold FOFs have a STCG period of 2 years taxed at the investor's tax slab while beyond that is LTCG of 12.5 per cent. Thus, Gold ETFs have better taxation as compared to other forms.

In your professional experience, which mode of gold investment is preferred by investors? What benefits does it offer?

Menon: Clearly, from overall tax benefit and costs, SGBs are a winner. Physical gold is the most expensive, both in terms of taxes as well as the transaction cost. In physical gold, the spread between buy and sell rates can be as high as 10 per cent. Compare this with a near zero in SGBs or a 0.2 per cent to 0.35per cent of annual expenses in gold ETFs and funds, and you know who the winner is.

Disclaimer: This does not replace professional financial advice. Consult a financial expert for personalised guidance.

Also Read: Diwali 2024: Will inflation affect gold buying during Dhanteras in Mumbai?