Diwali is today and many Indians would line up to buy gold. After two lean years of the Covid-19 pandemic, gold sales are expected to be strong this year. But before you too join the trend, here's what you should know.
Will gold and silver prices rebound?
Many go buying gold or silver on the auspicious occasion of Diwali with expectations of quick reward in terms of rising prices but it may not always come true. In the last one year gold prices in rupee terms have gained only 4.6 percent whereas silver has lost 12.41 percent.
“The rise in US interest rates and the likelihood of the hawkish stance of the US Federal Reserve converting into rate hikes, which may go well into the next year as well, may keep gold prices at the lower end of the range,” says Joseph Thomas, Head of Research, Emkay Wealth. There is no compelling reason to buy gold in a hurry, he says, adding, the prices may slide further offering better opportunities to accumulate at lower levels.
A strong dollar index has been a cause of concern for most precious metal investors. The prices may remain weak as long as the US dollar keeps appreciating against other currencies. Silver prices are subdued and factor in the possibility of an economic slowdown and recession.
“Demand for silver as an industrial product may increase as economies may revive from the slowdown or recession,” says Anuj Gupta, vice-president, research, commodity and currency, IIFL Securities. He expects silver to touch Rs 65,000 and Rs 75,000 per kilogram and gold prices to reach to Rs 55,000 and Rs 57,000 per 10 gram next year.
Opt for regulated investments
If you are keen to invest in physical gold, choose bullion gold – bars or coins in tamperproof packing. In all other cases, instead of jewellery or any other physical form of gold, financial investments tracking gold makes more sense. Exchange-traded funds (ETF) are regulated by the Securities & Exchange Board of India (SEBI). Sovereign gold bonds (SGBs) are issued by the Reserve Bank of India on behalf of the Government of India. Though digital gold is also catching up, experts advise staying with regulated options such as ETF or sovereign gold bonds.
“ETFs are easily accessible given the low ticket size. They are also well-regulated. Digital gold is yet to see a full-fledged regulatory framework. Till the time we see that, investors are better off going slow on digital gold,” says Pankaj Mathpal, Founder and Managing Director, Optima Money Managers.
Gold and silver ETFs
Gold is an essential ingredient of most portfolios since it acts as portfolio insurance in tough times and protects against inflation in the long term. 11 gold ETFs together manage assets worth Rs 19,861 crore as on September 30, 2022.
Units of gold ETFs are fairly liquid in the secondary market and investors can buy as low as one unit of gold ETF priced at around Rs 44 per piece. You do need a demat account to transact in units of ETFs. If you do not have a demat account, then you can consider investing in a fund of fund scheme. These schemes also allow investments through systematic investment plans.
Investments in silver can be a proxy play on emerging technologies such as electric vehicles, batteries and solar panels. Silver ETFs are relatively new for Indian investors. However, they are slowly catching up. In a short span of 10 months since inception, six ETFs hold silver worth Rs 1,299 crore, as on September 30, 2022. Even silver ETFs are easily accessible and fairly liquid in the secondary market.
Fund houses have also launched schemes that invest in a mix of units of gold and silver ETFs. The idea is to offer exposure to both precious metals under one scheme. Since silver is more volatile than gold, investors are better off holding both precious metals together as it may help contain volatility.
Sovereign gold bonds
Since ETFs charge expenses, not all investors are keen to buy ETFs, especially if they have a long-term view on gold. SGB can be a better way to invest in gold for long-term investors. It comes with a tenure of eight years and pays interest of 2.5 percent per year. Each of these bonds tracks the price of one gram of gold. At the time of maturity, the government promises to pay the rupee value of one gram of gold.
The only drawback SGB faces is low liquidity in the secondary market. As of now, there is no SGB public issue going on. However, you can pick and choose SGB from the secondary market. Check the residual maturity of the SGB and the price; buy to preferably hold till maturity.
Gains booked for units of ETFs, if held for more than three years, are taxed at 20 percent post-indexation benefit. Otherwise, gains are added to the investor's income and taxed at slab rate. For SGBs, the interest gets taxed as per slab rate. If the SGB is held till maturity, then the gains are tax-free. SGB, if sold after one year but before the maturity, then the gains are taxed at 20 percent post indexation. Otherwise, the gains are considered short-term capital gains and taxed as per slab rate.
To sum up, investing in precious metals through financial products has a distinct advantage. However, you have to be prudent in your approach while investing in these. “Investors should not consider Diwali a time to load up on gold or silver. Better to stagger your investments throughout the year in ETF units in line with your asset allocation,” says Mathpal.On the portfolio level, do not invest more than 15 percent of the money in precious metals such as gold and silver. Do not forget to gift yourself an SIP in a diversified equity fund or a debt fund as need be.