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Traditionally Indians have attached a sentimental value when it comes to investing in Gold in its physical forms. Ranging from goals to build an asset, to make a gift to a dear one on any milestone achievement in life or as an option of investment; gold has been a choice for the young and old, the educated, elite and/ or middle class. Investment in the bullion has also been an automatic choice in times of socio-economic-political uncertainties as well for many, and the pandemic of 2020 has seen no exception.

Gold Price Increase: A Concern

Given the increasing price of gold in recent times, this coveted asset class has been seemingly getting out of reach for the service class, though the desire to own a pie always remained. To cater to such investors and more, the Government of India introduced the Sovereign Gold Bonds (SGBs) in November 2015 as an alternate tool to buy gold. Since then the market has seen a considerable decline in the demand for gold in its physical form.

Along with SGBs, the government also introduced other alternative investments in gold with the introduction of Gold ETF and Gold mutual funds as well. However, with the influx of many alternatives, people now have an array of options to choose from. However, this posed a dilemma to choose the best option for investment.

Let us take a closer look at both SGBs and Mutual Funds and weigh the options:

SGB as an investment option:

SGBs are government papers denoted in grams of gold. The bonds are issued by RBI in consultation with the Government of India. For example, for 2020, the bonds were issued in 6 tranches between 28th April and 8th September 2020. Investors can apply for SGBs with both Nationalised Banks, scheduled Private Sector and Foreign banks, specified post offices, Stock Holding Corporation of India Ltd. (SHCIL), and designated stock exchanges either directly or via authorised agents. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.

Pros of investing in SGB:

  1. Assured fixed return:
    SGBs are a safe investment option for the investor as the gold quantity paid for, remains protected and can be redeemed at the time of maturity at the market value of gold and an annual 2.5% assured interest rate(paid bi-annually).
  2. Term:
    The maturity of an SGB is 8 years from the date of issuance but it can be redeemed at the ongoing market price in case of premature redemption if the investor so desires.
  3. Safe investment option:
    Since the bonds are held in scripts/ Demat form, the investor does not run the risk of losing gold as is the case with investing in its physical forms. Moreover, there are no issues of making charges or purity and chances of loss involved in them.
  4. Everyone can invest in SGBs:
    All including individuals, trusts, charitable and other institutions and HUF can invest in SGBs. It can be held singly or jointly as required. A nomination is also possible.
  5. How much can you buy?
    The SGBs can be purchased in denominations of 1 gm of gold. The maximum that an individual can invest in is 4kgs, 4kgs for HUF and 20kgs for a Trust in a fiscal year.
  6. More savings on the online application:
    Applications of purchase of SGB through online/ digital mode costs INR 50 less per gram than nominal value for an investor.
  7. Loan against SGBs available:
    Loans are available against SGBs. The loan to value ratio is the same as that applicable for loans against gold as stipulated by RBI.

Cons of investing in SGB:

  1. Risk involved:
    However, if the market price of gold falls, investors run the risk of losing capital, though the units of gold invested remain protected.
  2. Redemption price:
    On maturity of the SGBs, the redemption price is calculated on the simple average of the closing price of 999 purity of gold of the last 3 business days from the date of redemption. These rates are published by the India Bullion and Jewellers Association Limited.
  3. Lock-in:
    There is a lock-in period of 5 years from the date of issue of the bonds from the coupon payment dates and can be traded on Exchanges only post that. The investor has to apply for early redemption at least 1 working day before the expected date of redemption. Early redemption is allowed till 30 days before the maturity of the bond.

Tax implication on SGBs:

Interests on SGBs are taxable per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax on redemption of SGB to individuals has been exempted.

Mutual Fund as an investment option:

Simply put Mutual Fund is a pool of money/ vehicles professionally managed by Fund Managers. Given the diverse nature of the pool, the investor gets the option to enjoy the benefits of investing in both the bonds and equity markets all in one investment engine.

Pros of investing in Mutual Funds:

1. Professional Fund Management:
Mutual Fund is the best option for all investors who do not have the time, knowledge or inclination to actively follow the market, yet grow their wealth out of this engine. All they have to do is consult the website to study the fund, its composition and its performance and choose the fund to invest along with the time horizon to meet his / her financial goal. Else contact an authorised agent who can guide with his/ her expert advice. Fund management and returns are taken care of by the professional fund managers entrusted with the job.

2. Diverse portfolio:
Mutual funds by design are armed with combination stocks, bonds, money market instruments and other securities including gold, in order to ensure the best returns for the investors. Thus the risk if diversified in various instruments and chances of loss in a long time gets minimised.

3. Support financial goals:
Financial goals can range from, retirement, children’s education, marriage, purchasing a home, etc. There are a plethora of schemes each with different investment objective for an investor to choose from basis his/ her financial goals, including those for –

    • Tax savings, viz. Equity Linked Savings Scheme (ELSS),
    • Savings with returns better than savings accounts in backs, viz. Liquid or Ultra short term funds

So depending upon the need, an investor can choose the mutual fund for a particular time frame.

4. Minimal cost:
The investor can enjoy benefits of the active and efficient fund management against them as a small expense of 2.25% as stipulated and regulated by Security Exchange Board of India (SEBI) for most of the debt, equity and hybrid funds.

5. Minimum investment maximum benefit:
The best part of investing in Mutual Funds is that one can start investing in it with even a small investment of INR 500 a month through the Systematic Investment Plan (SIP) mode in order to reap the maximum benefits from market fluctuations. And then he/ she may choose to increase the investment in multiples of INR 500 in the same or any other fund of his/ her choice.

Also Read: Invest with Rs. 500 in Mutual Fund SIP

6. Liquidity:
Most of the open-ended schemes are open-ended and do not have a lock-in period. Thus they can be redeemed as and when required. Thus mutual funds are high on liquidity and can be redeemed directly into the bank accounts within 24 or 48 hours of the redemption request. However, tax schemes like ELSS have a lock-in for 3 years and schemes dedicated for children and retirement have a lock-in period of 5 years.

7. Tax-efficient:
Investing in ELSS gets the investors a deduction up to INR 1.5lacs under section 80(C) every fiscal year. There is no TDS done by mutual funds at maturity/ at the time of redemption. Investors are liable to bear the tax burden if any. Up to 1 lakh long term capital gains (LTCG) is exempt from taxes in a fiscal year.

Cons of investing in Mutual Funds:

  • Market Risk:
    Investment in Mutual funds involves a certain amount of market risks as it includes investments in instruments like equities, bonds, among others. However, if the investors stay invested for 7 to 10 years and more, they get to enjoy the benefits of the power of compounding and enjoy high returns on their mutual fund investments compared to those in SGBs.

Which is the best investment option?

Honestly speaking there is no such thing as one investment tool being better than the other. Rather people need to be mindful of ensuring they diversify their investment portfolio and not put all their eggs in one basket to ensure their financial goals are met irrespective of one asset class or investment not performing well. In fact, it is imperative to choose an investment tool or a combination of them, depending on the investor’s financial objectives and timelines (short term or long term) associated with them. Thus whether to invest in SGBs or Mutual Funds to get maximum returns is determined by one’s investment objectives and risk appetite.

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