Gold remains a preferred investment class for Indians for generations, not only due to financial reasons but also for cultural factors. India is the second-largest consumer of the precious metal. It is considered an auspicious asset. However, the new generation wants good returns from easy investment products like mutual funds, bonds and even direct equities. Yet, gold has held on to its charm. With products like gold bonds entering the market, investing in this precious metal has kept up with the changing times. Apoorva H Vora, Founder of Finolutions Wealthcare, in a conversation with Outlook Money's Vishav, discusses different aspects of gold investment
1. In this market environment, how much sense does it make to invest in gold? Who should look at gold as an investment asset?
Gold can surely be considered an investment asset. The real question is, how much allocation is to be made? If an individual is considering investment from a long term and asset allocation perspective, gold holds merit even now. The economic uncertainty and the pandemic still exist, while the Central Bank's actions led to a market pullback. Typically in uncertain times, investors do consider a tad higher tactical allocation towards gold.
2. Given the performance of gold in the past, what kind of returns should one expect? Can one expect returns to beat inflation?
The past does not equal the future. We are witnessing a rare correlation in otherwise non correlated asset classes like equities and gold -- an uncommon scenario. The objective of gold in your basket of investments is not just inflation-beating returns. If seen as an allocation, it often acts as a hedge against global economic uncertainties. The current rally may not sustain, but it can be closer to or generate returns beating inflation over a longer period.
3. Among physical gold and gold bonds, which one makes more sense to invest in and why?
There are several advantages of investing in gold bonds. Investors receive an additional 2.5% annual return paid in two installments every six months. The ease of buying and selling remains a positive factor with gold bonds. Compared to physical gold, there is no storage cost. However, gold bonds may not work well for individuals wanting to play a tactical allocation on gold.
4. How do gold bonds compare with fixed income schemes like fixed deposits (FDs) and Public Provident Fund (PPF)?
Essentially, all these are different asset classes that serve varied purposes. An individual's investment basket should always be a mix of long-term and short-term considerations for money. FDs and PPF investments offer fixed returns, but going by track records, gold has generated higher returns than FDs. It is equally easy to unwind positions from gold investments.
5. What are some of the tax implications of investments in gold and gold bonds?
Sovereign gold bonds have an eight-year tenor. However, there is no capital gains tax if an investor holds the investment until maturity. If the bonds are sold through an exchange three years within purchase, gains, if any, will get added to the gross income. It will be taxable at a marginal rate. If one holds it for more than three years, long-term capital gains tax at 20 per cent and cess will apply.
6. What are some of the things one must keep in mind that are specific to gold investment?
One can build gold exposure through physical gold. Exchange Traded Funds (ETF), mining stocks, gold-based structured products or sovereign bonds. Individuals need to consider this investment as part of their asset allocation model. Gold is a safe and stable investment avenue. It can reduce the volatility of an investment basket and act as a reasonable hedge against global economic uncertainties.