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Last Updated : Mar 12, 2020 05:37 PM IST | Source:

Gold: The lone saviour amid gloomy markets

A 5-10 per cent allocation to gold in the overall portfolio is what most financial planners advise


The continuing rally in gold prices in the backdrop of a deteriorating macro-economic scenario globally has made investors rush for the yellow metal as a good addition to their portfolios. Increasing volumes and decreasing discount on the traded price of sovereign gold bonds (SGBs) to the spot price of the bullion, indicates that investors are slowly but surely lapping up SGBs. Gold mutual funds have also seen increased inflows in recent times.

Rising interest in gold


Gold ETFs have witnessed net inflows (more money came in than went out) of Rs 1808 crore since April 1, according to data from industry body AMFI. In February, the net inflows recorded were the highest, at Rs 1,483 crore. This was a seven-fold increase over the figures in January.

Investors are also buying gold bonds – from present and past issues – on the stock exchanges. According to the traded volume data on stock exchanges sourced from Ace Equity, the average daily traded volume has gone up to 3807 bonds during February 2020, whereas in February 2019, it stood at 2621 bonds. Also, the discount at which the bonds trade to the spot price of gold, has also shrunk.

An increase in demand for listed gold bonds has resulted in a rise in prices. As a result, discounts have shrunk to 6 per cent, from 9 per cent earlier. This indicates the increasing interest from investors.

Have investments been rewarding?

Spot gold prices have moved up 38 per cent – from Rs 32420 to Rs 44940 per 10 grams – over the past one year. SGBs are a cost effective way to investing in gold, as there are no expenses associated with them, as is the case with gold exchange traded funds and gold saving funds. Also, SGBs pay an interest of 2.5 per cent (payable half yearly). Though the discount at which the bonds trade on the stock exchange have narrowed and volumes have picked up, low liquidity is still a problem for investors. If prices fall, investor interest may decline and liquidity may decline further.

Gold saving funds that invest in gold ETFs have adequate liquidity at a fair value. These schemes charge you an expense ratio – ranging from 35 basis points to 1.12 per cent for gold ETFs and 18 basis point to 1.19 per cent for gold savings funds. MF schemes tracking gold prices have given 35.58 per cent returns on an average over past one year, according to data from Value Research.

Will gold prices head north?

As financial markets turn more volatile, investors are expected to embrace gold as a safe-haven asset class. “Based on current geopolitical situations, global economic slowdown and sluggish Indian economy, Gold continues to serve as a safe haven for global investors,” says Sunandh Subramaniam, senior research analyst-commodity and currency markets, Choice Broking. He expects gold prices to go up to Rs 48000 in the next 14 to 18 months on the Multi Commodity Exchange.

Should you invest in gold?

“Since SGBs are exempt from tax on capital gains if held till maturity, they are an attractive investment option for investors looking to invest in gold,” says Parul Maheshwari, a Mumbai-based certified financial planner. Do not ignore the low liquidity in the secondary market and be prepared to hold on till maturity. The bonds have a tenure of eight years.

Though gold does not offer any cash flows in the form of interest and dividends, SGBs do offer interest which makes them attractive for many investors. The interest so paid on the SGB is taxable in the hands of the investors. If the bond is sold on the stock exchange, then gains are subject to a long-term capital gains tax of 20.4 per cent, if held for more than three years. Otherwise the capital gain is added to the investor’s income and taxed at the slab rate. The same rate of taxation applies to the gains pocketed on gold ETFs and gold saving funds.

Gold may look very attractive right now, but going overboard must be avoided. Maheshwari advises sticking to asset allocation. A 5-10 per cent allocation to gold in the overall portfolio is what most financial planners advise.

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First Published on Mar 12, 2020 05:29 pm
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