Gold is undoubtedly one of the most cherished possessions among Indians. There is a large category of people who love to hoard gold and have been doing so habitually since they walked into their work-lives. On any pretext ranging from gifting, birth in the family, the marriage of a loved one or religious festivals, they would buy gold ornaments, coins and bars and take pride in it. However, they fail to realise that hoarding gold, though maybe ‘food for the soul’; is not a real investment as it fails to earn any income, interest or dividend till such time they are sold in the market or pawned to tide over some unforeseen financial crisis. Moreover gold has earned itself a sentimental value among Indians unlike the rest of the world. Thus selling gold for income or as a source of money does not occur easily to us Indians.
However, there are other alternate options to invest in gold that can earn returns and contribute to wealth creation for people. These days gold is available in both its physical forms and as papers as well. Physical forms include ornaments, bars, coins and artefacts of various shapes and sizes. Paper or dematerialised forms of investments range from Sovereign Gold Bonds (SGBs) to Exchange Traded Funds (ETFs) to Gold Mutual Funds that actually invest in ETFs for their returns.
If the desire is to invest in a tool that is safe, liquid and gives returns in the real sense as well, then one should ideally look at investing in tools like Sovereign Gold Bonds or Public Provident Funds (PPF). Let us assess these tools to make a conscious decision to choose the right tool.
Sovereign Gold Bonds are a simple yet better alternative to investment in gold and are done in paper form. It is denominated in grams of gold. So the minimum investment required is in just 1 gm of gold and it’s multiple thereafter. As an individual, one can purchase 4kgs of SGBs in a financial year. There is no need to have a demat account to buy SGBs, though trading in SGBs in the secondary market is possible only through demat accounts. Joint account holding of the bonds and nomination is allowed in SGBs.
SGBs are issued by the Reserve Bank of India in consensus with GOI. They are sold by opening weekly windows every 2 to 3 months. Investors need to keep a watch and invest in these bonds at an issue price per gm of gold. In case one wants to make a purchase at any other time, they may do so from the secondary market. The price, in that case, will be the market price of the SGB at that time.
SGBs are made available to the public from an array of distribution points viz.
An investor may have to settle for a different redemption price of the SGBs as compared to the existing market value at the time of redemption of the bonds. This is because of the inherent nature of the calculation of the redemption price of the bonds.
Public Provident Funds (PPF) is one of the most sought after investment options in India among young and old. The primary reason for this is because of its high-interest rate and tax benefits. In fact among all known debt instruments involving small savings and their fixed interest rates, the interest rate of PPF is the highest till date. Traditionally for the middle class, PPF accounts have been opened by parents in the names of their children when they were very young and handed over to the latter when they started making their own living. This was a way in which parents imbibed in children the habit of savings and the importance of doing so.
1. Tenure of investment:
An investment in PPF matures in 15 years. On maturity, one can withdraw the entire maturity amount with interest and close the account. However, if the investor so desires, he/ she can extend the term for five years with or without further payment. In case the investor chooses the option to continue the account without further investment, even then his invested amount will keep earning the interest indefinitely till further intimation from his end at the end of the extended term(s) of the block of 5 years.
2. Interest Assured:
The current rate of interest is 7.10% which is compounded annually and is the highest available in the small savings segment. This rate of interest is assured but not fixed under any circumstance. The rate of interest in PPF is connected to the 10-year-old GOI bond yield that may change from time to time.
3. Liquidity available:
A PPF account ensures that it gives enough liquidity to the investor to take care of his/ her financial exigencies. It allows for partial withdrawal from the 6th year onwards up to 50% of the balance available at the end of 4th year or the immediately preceding year, whichever is lower. Only one such withdrawal is allowed in a financial year.
Withdrawals are not allowed before the account has completed 5 years. Still, adequate liquidity is made available in the form of loan in lieu of 25% of the balance in the account at the last financial year. The rate of interest for such a loan is just 1%. The loan is expected to be repaid within 3 years from the date of borrowing. Fresh loans can be availed only post the earlier loan has been completely repaid.
4. Cap in investment:
A PPF account can be maintained with just INR 500 of investment a year (else account becomes dormant). The maximum investment allowed in a financial year is INR 1,50,000. In case anyone invests more than INR 1.5Lacs in an FY, that portion of the investment does not earn any interest. Thus investors beware. A separate investment in the name of spouse or child is allowed with a similar amount and tax benefits can be availed on the second account as well.
5. Tax Benefit of PPF (Exempt- Exempt-Exempt):
Investment in a PPF is full of tax benefits as listed below –
Thus while both SGBs and PPF accounts have their own strengths, they have their weaknesses too. Depending on the investment objectives, investors must wisely choose their investment tools to ensure they have a diversified portfolio to tide over inflation and market vulnerability and ensure maximum returns on investments to make their financial goals a reality.