Dhirendra Kumar explains if investing in gold is productive in the long term
Would you suggest investing in a gold fund through SIP for the next five years? What are the other options?
- Kaushik Chatterjee
Generally speaking, one should not be investing in gold funds. One should not make a long-term investment in gold because I think it is a store of value but not appreciating capital or productive capital. Because when you invest in bonds or fixed income of any kind, you are lending money to somebody who is then putting it to effective use and giving you some kind of a predictable return. When you are investing in equity, you are taking proportionate ownership, and you are entitled to the proportionate benefit that it brings in the form of earnings or dividends. When you invest in gold, it just sits there. It is not a productive asset. So generally, long-term investment is avoidable.
But it is an asset that has the oldest history and legacy. So gold has its charm. There are many ways in which you own gold. One is jewellery - you enjoy it, show it to people, and spend money purchasing it. But then there are 'making charges' for it. So it is not an investment. I think it is for consumption, given the cost of converting gold into jewellery or the reverse process.
Likewise, in the case of gold bars and coins and other things, I think it is easy to buy, but I don't know how easy it is to sell and realise the money. Another way of owning gold is in the form of gold ETFs. But it comes with a cost as it has an expense ratio. Also, you can't own them if you don't have a demat account, which is a hurdle for the ease of buying. Then there are gold funds like a mutual fund that owns these gold ETFs and have a slightly higher cost than ETFs.
But I think the finest form of gold ownership is the sovereign gold bonds (SGBs) which are available to Indian investors. It is an interesting option for Indian investors, and it is easy to buy them because the government issues them every now and then. So you can buy it directly from the government through a bank and a few times in a year when it is issued. It is also available in the secondary market for an individual investor. There too, it is easy to buy because today you have many online brokers who provide you almost frictionless ability to buy these SGBs.
These SGBs not only give you the return on gold, but they also give you a two-and-a-half per cent annual return over and above the gold prices irrespective of whether the gold prices depreciate or appreciate. So this additional return over and above that change in gold prices makes it very compelling. Further, if you buy it directly from the government when issued and hold it for the entire term, which is eight years, all the returns over this period also become tax-free if you don't sell it in between. So for Indian investors, the finest form of gold ownership is SGBs.