Dhanteras 2021: Is it time to go beyond buying physical gold?

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Dhanteras has always been considered as the most auspicious occasion for buying Gold, Silver, and other metals. While, ancient legend ascribes the occasion to an interesting story about the 16-year-old son of King Hima, whose life was saved by his bright and intelligent daughter-in-law. Fast forward to today, the investor community who are keen to partake in this auspicious tradition, have their intelligence being exercised, just like Hima's daughter-in-law, to choose the most efficient way to invest in Gold.

Today, we have a plethora of options to invest in Gold, for instance, investing via physical Gold, Gold ETFs, Gold mutual funds, and Sovereign Gold Bonds (SGB). In choosing an option, one has to demarcate between ritualistic significance and investment objectives. It will not be wrong to say that occasions such as Dhanteras were an arguably ancient form of Gold SIP, which ensured that families allocated some part of their wealth in an asset that for centuries had been the most efficient hedge against inflation and an excellent reserve of wealth. Yet today, it’s time to continue this tradition but with some alterations.

Investors can look at splitting their investment allocation into physical and financial forms. Ideally, one can look at investing in a small sovereign to continue with the tradition, large allocations are not advisable as physical Gold is associated with risks like making charges, storage issues/costs, theft, purity, and illiquidity.

On the financial options spectrum, one can choose between Gold ETF, Gold Funds, and SGB. Although Gold ETFs and Gold Mutual Funds are quite similar, they come with some subtle differences.

Gold ETFs are mutual funds that invest in Gold as the principal asset and mirror the domestic gold prices. The units of Gold ETF are traded on the stock exchange, just like stocks. One unit of Gold ETF represents one gram of Gold. To invest, investors require a Demat account. This investment form is fairly tax-friendly, as returns generated from Gold ETF are subject to long-term capital gain tax, without the burden of sales tax, VAT, or wealth tax.

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Whereas, Gold mutual funds are funds that primarily invest in Gold ETFs as an underlying asset. This makes them slightly cost-in-efficient because gold funds invest in Gold ETFs, hence, the expense ratio of the mutual fund would include expenses of the ETFs. That said, one can invest in gold funds through SIPs, which is not possible in Gold ETFs. On a lump-sum basis, Gold ETF is a more prudent option.

SGB is also an excellent alternative to holding Gold in physical form. Investors are assured of the market value of Gold at the time of maturity and periodical interest. SGB pays out interest of 2.5 percent per annum on the initial investment, semi-annually. Further, while the interest component of SGB is taxable, if held till maturity (eight years), then the capital gains earned do not attract any capital gains tax, making it an attractive option from a long-term holding perspective.

While choosing the appropriate financial option to invest in Gold, one must base their decision on factors like Pricing, Investment Mode, The Minimum Investment Amount, Transaction Cost, Expense Ratio, and Liquidity.

That said, the time is here to start looking at Gold investment only from a physical asset perspective.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.