Do investors have any suitable alternative to physical gold?
—Name withheld on request Over the last few years, several alternatives to buying physical gold have emerged that generate higher returns. From a cost, tax and return perspective, sovereign gold bonds (SGBs) issued by the government of India are possibly the best option. SGBs get you a 2.5% annual interest if you hold these until maturity, which is eight years from the issue date.
Capital gains on SGBs are exempt from tax if held for more than three years. If held for less than three years, short-term capital gains from this are taxed at the investor’s marginal tax rate. There are other options such as gold ETFs, digital gold, and gold mutual funds.
ETFs are short for exchange-traded funds. Gold ETFs don’t have the additional interest that SGB’s provide, have higher costs and relatively an inefficient taxation. There are also issues with its buying and selling on the stock markets where liquidity could be on the lower side.
Gold mutual funds are of two types: One is funds that buy gold ETFs; however, the returns are now taxed at the slab rate and hence very inefficient for higher earning individuals. Second is mutual funds that own shares of gold mining companies—these are completely avoidable as the prices of these companies are a factor of gold prices, gold supply, currency prices and more. Do note that there are institutions that provide digital gold and offer to convert it into physical gold when needed, however the costs they charge as mark ups are very high.
In case conversion to physical gold is needed, it is best to sell SGB’s and then buy physical gold which would be more efficient. SGB offer the best of both worlds and should be the best option. Vivek Banka is co-founder, GoalTeller.Milestone Alert!
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