Gold Investment in India: Coins or Bars?

Ans: Gold can be a valuable addition to your portfolio. It has always been considered an asset that can hedge against inflation and other economic uncertainties. There are three popular ways to invest in gold.

Gold ETFs (Exchange-Traded Funds): Gold ETFs offer easy liquidity, as they are traded on stock exchanges just like stocks. They provide a direct exposure to the price of gold.
Taxation - Profits on the sale/redemption of Gold ETFs or units of gold saving funds bought after 31st March 2013 will be taxed as short capital gains irrespective of the holding period. So, this will be taxed as per an individual’s current tax slab.

Gold Mutual Funds: Gold mutual funds pool investments from multiple investors and provide professional fund management. They are an excellent choice for those who prefer a diversified approach.
Expense ratios and load fees can vary.
It is advisable to keep the investment in gold within 5% to 10% of one’s total investment portfolio.
Taxability is similar to that of Gold ETFs.

Sovereign Gold Bonds (SGBs): SGBs are issued by the Government of India and they provide an additional annual interest income. SGBs are suited for long-term investors who are looking for a safe haven asset and are willing to hold on to their investment for at least 5 years, preferably full 8 years to get the tax advantage of Zero capital gains tax on gains made.
The returns on SGBs are not guaranteed, and they depend on the prevailing market price of gold at the time of sale. There is a lock-in period of 5 years, so you cannot exit your investment before then.

SGBs may be the right choice. If liquidity and trading flexibility are important, consider Gold ETFs. Gold mutual funds are suitable for diversification, doing SIPs and professional management.

Ans: This requires a detailed explanation. I had written a detailed article on this gold taxation aspect. Please check it here - https://stableinvestor.com/2020/06/taxation-gold-capital-gains.html

Ans: Including gold in your investment portfolio can offer diversification and act as a hedge against inflation and market volatility. However, the costs associated with purchasing and storing physical gold, such as making charges, GST, and safe storage costs, can impact your returns. Here are some recommendations on how to include gold in your portfolio and the suggested percentage allocation:

Gold ETFs or Gold Mutual Funds:

Advantages: Gold ETFs (Exchange Traded Funds) and Gold Mutual Funds offer a cost-effective way to invest in gold without incurring making charges or GST.
Allocation: Consider allocating 5-10% of your investment portfolio to gold ETFs or Gold Mutual Funds to diversify your portfolio and mitigate risks.
Gold Savings Fund:

Advantages: Gold Savings Funds invest in gold ETFs and offer the convenience of SIP (Systematic Investment Plan) investments. They also provide the benefit of professional fund management.
Allocation: You can allocate a portion of your monthly SIP towards Gold Savings Funds to accumulate gold over time.
Sovereign Gold Bonds (SGBs):

Advantages: SGBs are government-backed securities denominated in grams of gold. They offer an annual interest rate and capital gains tax benefits if held until maturity.
Allocation: Consider investing in SGBs as part of your fixed income allocation, keeping in mind the lock-in period and liquidity constraints.
Physical Gold Coins or Bars:

Advantages: Physical gold offers tangible ownership and can be a part of your emergency reserve or long-term wealth preservation strategy.
Allocation: If you prefer physical gold, limit the allocation to a smaller percentage (e.g., 1-2% of your portfolio) due to the additional costs and liquidity constraints.
Recommendations:

Diversification: Include gold as a part of your diversified investment portfolio to mitigate risks and enhance overall returns.
Cost Consideration: Opt for cost-effective investment options like Gold ETFs, Gold Mutual Funds, or Gold Savings Funds to avoid high making charges and GST.
Asset Allocation: Maintain a balanced asset allocation based on your risk tolerance, investment goals, and time horizon. A typical allocation to gold ranges from 5% to 10% of the total portfolio.
Regular Review: Periodically review your investment portfolio and rebalance as needed to maintain the desired asset allocation and align with your financial goals.
Consult with a financial advisor to determine the most suitable allocation to gold based on your individual financial situation, goals, and risk tolerance. They can provide personalized recommendations and guidance to help you make informed investment decisions.

Ans: Investing in gold can be a valuable addition to your portfolio for diversification and wealth preservation. Let's explore the pros and cons of investing in gold bars/biscuits versus gold jewelry.

Acknowledging the Need for Diversification
It's great to see your interest in diversifying your investment portfolio at a young age, reflecting your commitment to financial stability and growth.

I understand the importance of exploring different investment options like gold to hedge against economic uncertainties and inflation.

Evaluating Gold Investment Options
Gold Bars/Biscuits: Investing in physical gold in the form of bars or biscuits offers liquidity and ease of storage. You can buy and sell gold bars/biscuits easily through authorized dealers or bullion exchanges.
Gold Jewelry: While gold jewelry has aesthetic value, it may not be the most efficient form of investment due to additional costs like making charges and potential loss of value due to fashion trends or wear and tear.
Advantages of Gold Bars/Biscuits
Purity and Value: Gold bars/biscuits are typically of high purity and standard weight, making them easily tradable and recognizable in the market.
Investment Focus: Investing in gold bars/biscuits allows you to focus solely on the investment aspect without being influenced by aesthetic preferences or fashion trends.
Disadvantages of Gold Jewelry
Additional Costs: Gold jewelry incurs additional costs like making charges, which can reduce your overall returns compared to investing in gold bars/biscuits.
Subject to Wear and Tear: Jewelry is susceptible to wear and tear over time, which may affect its resale value and add to maintenance costs.

While both options offer exposure to the gold market, investing in gold bars/biscuits is generally more conducive to investment purposes due to their purity, liquidity, and ease of storage. However, it's essential to consider your personal preferences and financial goals when making investment decisions.

Evaluating SGBs and Gold Funds
Sovereign Gold Bonds (SGBs): SGBs are government-backed securities denominated in grams of gold. They offer the combined benefits of gold investment and fixed interest income.
Gold Funds: Gold funds invest in a diversified portfolio of gold-related assets such as physical gold, gold ETFs, and mining stocks. They provide exposure to the gold market without the hassle of owning physical gold.
Advantages of SGBs
Safety and Security: SGBs are issued by the government, making them a safe and secure investment option compared to other forms of gold investment.
Interest Income: In addition to potential capital appreciation, SGBs offer a fixed interest rate on the invested amount, providing an additional source of income.
Advantages of Gold Funds
Professional Management: Gold funds are managed by experienced fund managers who make strategic investment decisions to maximize returns and mitigate risks.
Liquidity and Convenience: Investing in gold funds offers liquidity and convenience, allowing you to buy and sell units easily through the stock exchange.
Considerations for Investment
Risk Tolerance: Assess your risk tolerance and investment objectives to determine the most suitable gold investment option for your portfolio.
Diversification Benefits: Consider how adding SGBs or gold funds complements your existing investments and contributes to portfolio diversification.
Conclusion
By incorporating Sovereign Gold Bonds (SGBs) and Gold Funds into your investment strategy alongside physical gold, you can enhance portfolio diversification and capitalize on the potential benefits of investing in gold.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in