Tag: sovereign gold bonds

Why you should hold gold in your portfolio

Personal Finance

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It is quite common to see investors making investments in stocks, bonds, and bank deposits. However, gold investment is just secondary for most of them. Investing only for returns in gold undermines the strategic nature of the asset class. Owning gold is not just about the upside potential but also about minimizing risks to the downside.

Contains downside risk

The risks include radical monetary policies, ultra-low interest rates, exploding world debt, asset bubbles, currencies losing their worth, trade wars, geopolitical conflicts, and market volatility. These global risks have fueled the need for holding an asset like gold. Gold has the potential to help generate higher risk-adjusted returns due to its low correlation to major asset classes.

From 2004 to 2021, a traditional 60-40 Equity-Debt portfolio based on Sensex and Crisil Composite Bond Fund Index had given annual returns of 11.13 per cent with maximum drawdown of 36 per cent. When gold was added to this mix, the 40-40-20 Equity-Debt-Gold portfolio’s annual returns were maintained at 11.13 per cent, but risk was reduced with maximum drawdown being only 21 per cent (see table). Thus, adding gold to an investment portfolio has effectively reduced risk without sacrificing return, making it a must-have in one’s portfolio.

 

Ways to invest

Even though gold coins and jewellery are still preferred by most, sophisticated investors are starting to move to more efficient forms of purchasing yellow metal. That is because purity is always a concern when buying physical gold. In addition, the purchase of gold bars and coins comes at a premium of 5-15 per cent above gold prices on account of wholesale and retail markups and making charges. This amount plus the 3 per cent GST paid at the time of purchase remains irrecoverable on sale.

Amid increased awareness of the drawbacks of physical gold, financial forms like Gold ETFs are gaining traction. Gold ETFs are listed on the exchanges and invest in physical gold. Each unit of the Gold ETF represents ½ or 1 gram of 24 carats physical gold. Investing in Gold ETFs do not bear any making charges or high premium associated with physical gold. Also, there can be no worry about purity, storage, and insurance of gold. Gold ETFs are traded on the exchange at the prevailing market price of physical gold. Investors can buy or sell holdings at close to the market price without paying a high premium on purchase or selling at a steep discount.

Mutual fund investors who prefer investing via SIP can invest in the Gold ETF via a Gold Savings fund.

Another financial avenue for gold investing is Sovereign Gold Bonds (SGB). Though these bonds pay an annual interest of 2.5 per cent and are tax-efficient, they suffer from low liquidity. They have an 8-year tenure with an exit option from the 5th year onwards only. Also, they are tradable on exchanges but only among their tranches of issuance, thus limiting liquidity and usually seen trading at a discount. So, from a portfolio perspective, Gold ETFs are far more efficient. In addition, unlike Gold ETFs, SGBs are not backed by gold, but have an implicit government guarantee.

Also, fast gaining popularity among the masses is digital gold offerings. These allow investors to invest in 24 karat gold, which is then stored in secure vaults on their behalf. With no limitations on an investment amount, one can start buying gold for as low as Re.1. However, these offerings are not regulated and provide no recourse to investors if something goes wrong. In addition, digital gold is not as efficient as Gold ETFs as there is a loss on resale due to high bid-ask spreads. The 3 per cent GST paid at the time of purchasing too cannot be recovered on resale.

To sum up, gold would provide your portfolio the much-needed fillip, stability and cushioning in unpredictable times by reducing the impact of global economic shocks. The long-term allocation of this asset around 10 – 15 per cent in a portfolio via efficient investment avenues cannot be asserted enough.

The writer is Senior Fund Manager, Alternative Investments, Quantum AMC

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Why investing via wallets in gold is fraught with risks

Personal Finance

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Are you in a rush to buy gold, given the breathtaking rally of the metal? It is understandable that as an investor hunting for returns, you don’t want to miss the bus. In this article, we make compare different modes of digital investment in gold based on safety and returns.

There are broadly three ways to invest in gold digitally — buying through mobile wallet companies such as Paytm, PhonePe or GooglePay or through digital platforms of players such as Motilal Oswal and HDFC securities; buying through mutual funds via listed gold exchange-traded funds (ETFs); and buying sovereign gold bonds (SGBs) of the RBI.

Gold ETFs

Gold ETFs are safe and transparent instruments. There are many checks and balances in place to ensure that the investor is not cheated.

For every unit of the instrument you buy, there is physical gold bought by the AMC (asset management company) and this is checked by a SEBI-registered custodian (for most gold ETFs, it is Deutsche Bank).

The presence of a custodian in gold ETFs of mutual funds, besides a trustee, adds a layer of safety for investors.

The custodian is responsible for safekeeping of gold, and is obliged to keep a check on gold holdings’ net inflows and outflows.

 

Further, in the case of gold ETFs, all gold is stored with an independent vaulting agency — mostly, Brink’s India — where records are maintained on a daily basis for bar number, purity certificate, gold movement, etc.

Also, unlike issuers of digital gold, the MFs issuing gold ETFs are required to give periodic disclosures on fund holdings through a fact sheet at the end of every month to SEBI. Also, there is auditing of the gold-holding of the MF by internal as we all as SEBI auditors.

Charges: For an investor, gold ETFs may work out cheaper than digital gold of mobile wallets. Investors can buy and sell gold ETFs without GST. However, note that there is a fund management cost and brokerage.

Sovereign gold bonds

SGBs score the highest on safety among the digital gold investments.

It is issued by the Reserve Bank of India (in denominations of one gram of gold and in multiples thereof) and comes with sovereign guarantee. It is available in demat form.

Further, there is an added benefit of 2.5 per cent per annum interest, that boosts returns for the investor.

Also, if you hold it till maturity, that is, eight years, there is no tax on the capital gains from gold price increase. The bonds is issued and redeemed at the market price of gold.

Charges: There is no extra cost on SGBs but for what you pay the broker (or other intermediaries) to buy the bond.

There is discount available for investors buying online at the time of the primary issue by the RBI.

Digital platforms

MMTC-PAMP — a joint venture between MMTC, a Government of India company that is into gold trading, and PAMP, a Switzerland-based gold refiner — sells gold as coins/bars in different denominations through retail outlets and also digitally. You can buy the gold of MMTC-PAMP through players including Paytm, PhonePe, Google Pay, or through stock brokers such as HDFC securities or Motilal Oswal, digitally. While the purity of gold of MMTC-PAMP is assured (it is LBMA ( London Bullion Market Association)-certified for 999.9 purity), the lack of regulation in the space poses a risk.

There is no watchdog governing this space, like the Securities Exchange Board of India that governs gold ETFs or the Reserve Bank of India that oversees sovereign gold bonds.

In September 2019, there was news of the Central government considering closing of some operations of MMTC.

MMTC-PAMP tried to calm the nerves of its investors by saying that MMTC was only a minority shareholder in the entity and that the joint venture will continue unaffected by the government’s decision.

It added that IDBI Security is its trustee and that customers’ gold is safe with it.

But this may have to be taken with a pinch of salt as there is no regulator and there is no independent auditing of the holdings.

For people wanting to buy physical gold digitally, another option is using SafeGold, which is offered through mobile wallets, including PhonePe. Again, this is an unregulated entity and risks are the same as investing through MMTC-PAMP.

Besides, the gold you buy here is a tad lower in purity — 995 fineness against 999.9 offi MMTC-PAMP gold.

The point in which SafeGold scores is that it stores gold in Brink’s India vaults unlike MMTC-PAMP, which keeps customers’ precious metal in its own vaults.

Note that while the digital platforms allow you to sell the gold in your account without having to redeem it physically, you cannot sell gold on the same day you buy it.

Also, there is a 2-3 per cent difference between the buy and sell prices because of the charges levied by the distributor/gold-issuer. Further, with MMTC-PAMP, you can keep gold only for five years, and with SafeGold, it is two years from the date of purchase.

Charges: The cost of buying gold through the digital platforms is higher. For instance, on August 12, the rate on Paytm for buying 1 gram of 24k gold was ₹5,423.32, while gold ETFs were quoting at ₹5,193/gram (the LBMA spot price). Besides, note that each time you buy/sell gold via digital platforms, you will be charged 3 per cent GST.

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