Physical gold, gold ETF or bond
If you want to invest in gold, there is no need to buy jewellery because it involves making charges and other incidental expenses. This means those who wish to invest in physical gold should go for gold bars. However, GST has complicated the situation.
While a jeweller will charge you 3% GST on a gold bar, he will not compensate you when you sell it back. This is in addition to the premium the jeweller may charge at the time of selling and the discount he may demand when he buys it back. However, gold bars have some inherent advantages. In a real sense, insurance against unforeseen circumstances can happen only with physical gold and not with paper gold. This is because if the financial market is shut, liquidity for your paper gold will be zero
Theoretically, sovereign gold bonds issued by RBI are the best because they also offer additional interest for holding gold. But investors are not enthused because SGBs have very low liquidity in the secondary market. Most SGBs are trading below the gold price. Even after adjusting for the interest received, SGBs underperformed gold by around 10%.
This discount is due to low liquidity. It will continue till the government appoints market makers for these bonds. As of now, there is no plan by the government to appoint any market makers. However, gold bond remains as a good option for long-term investors who are ready to hold for at least five years, when they can be redeemed. If you can get SGBs at a discount, it makes sense to buy from the secondary market. However, keep in mind that the volume traded is low and price may move up if some large buy order comes.
Gold Funds, on the other hand, are meant for investors who want regular liquidity. However, not all gold ETFs command high liquidity. This explains why some gold ETFs have generated significant losses during the past one year when gold prices remained flat. Investors should remain with highly liquid ETFs such as Reliance Gold BEES. Investors also should keep in mind that there is an annual expense of around 1% per annum and therefore, the return from these instruments will always be less than the movement in the prices of the yellow metal.
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