Diwali is today and many Indians would queue up to buy gold. After two lean years following the Covid-19 pandemic, gold sales are expected to be strong this year. But before you jump on the bandwagon, here’s what you need to know
Many buy gold or silver on the auspicious occasion of Diwali in the expectation of a quick reward in the form of rising prices, but this is not always the case. Over the past year, gold prices increased by just 4.6% in rupee terms, while silver lost 12.41%.
“Rising US interest rates and the likelihood that the Fed’s dovish stance translates into rate hikes that could continue into next year could keep gold prices low. There is no compelling reason to buy gold in a hurry, he says, adding that prices could fall further, providing better opportunities for accumulation at lower levels.
A strong dollar index worries most precious metals investors. Prices could remain weak as the US dollar continues to appreciate against other currencies. Silver prices are subdued considering the possibility of an economic slowdown and recession.
If you want to invest in physical gold, choose gold bullion: bars or coins in tamper-evident packaging. In all other cases, investments make more sense than jewelry or other physical forms of gold. Exchange-traded funds (ETFs) are regulated by the Securities and Exchange Board of India (SEBI). Sovereign Gold Bonds (SGB) is issued by the Reserve Bank of India on behalf of the Indian government. Although digital gold is also catching up, experts advise sticking with regulated options like ETFs or government gold bonds.
Gold is an essential component in most portfolios, acting as portfolio insurance in tough times and protecting against long-term inflation. 11 gold ETFs collectively manage assets worth Rs 19,861 crore as of September 30, 2022.
Gold ETF units are quite liquid on the secondary market and investors can already buy a gold ETF unit at around Rs 44 per coin. You need a Demat account to trade ETF shares. If you don’t have a Demat account, you may want to consider investing in a fund of funds. These systems also allow investments through systematic investment plans.
Investing in silver can be a bet on new technologies such as electric vehicles, batteries and solar panels. Silver ETFs are relatively new to Indian investors. However, little by little they are catching up. Within 10 months of inception, six ETFs hold silver valued at Rs 1,299 crore as of 30 Sep 2022. Even silver ETFs are readily available on the secondary market and quite liquid.
Fund houses have also launched programs that invest in a combination of gold and silver ETF shares. The idea is to offer exposure to both precious metals in a single program. Because silver is more volatile than gold, investors should keep the two precious metals together as they can help curb volatility.
Because ETFs charge a fee, not all investors are interested in buying ETFs, especially if they take a long-term view of gold. SGB may be a better way to invest in gold for long-term investors. It has a term of eight years and accrues interest of 2.5 percent per year. Each of these bonds reflects the price of one gram of gold. At maturity, the government agrees to pay the equivalent in rupees of one gram of gold.
The only drawback that SGB faces is low liquidity in the secondary market. There is currently no ongoing public GBS problem. However, you can select SGB on the secondary market. Check the remaining term of the SGB and the price; preferably buy to hold until expiration.
Gains recognized on ETF shares held for more than three years are taxed at 20% after indexation. Otherwise, the gains are added to the investor’s income and are taxed at a fixed rate. With SGB, the interest is taxed at a fixed rate. If the SGB is held to maturity, the earnings are tax-free. SGB if sold after one year but before maturity, profits are taxed at 20% after indexation. Otherwise, the gains are treated as short-term capital gains and are taxed at a fixed rate.
In short, investing in precious metals versus financial products has a distinct advantage. However, you need to be careful in your approach when investing in these. “Investors shouldn’t view Diwali as a time to stock up on gold or silver. It’s best to invest in ETF stocks throughout the year according to your asset allocation,” explains Mathpal.
At the portfolio level, do not invest more than 15% of your money in precious metals such as gold and silver. Consider offering yourself a SIP in a diversified equity or debt fund if necessary.