Ways to Invest in Precious Metals: Gold & Silver
In
times of economic turmoil, precious metals (gold, silver) tend to retain their
value or even appreciate. It is for this reason that they are so attractive as
investment options as they provide a buffer to an equity-debt portfolio, as
well as appreciate over time.
Unlike
gold, silver has immense technical and industrial uses as it is an excellent
thermal and electrical conductor. It is widely used in specialist electronics
and solar panels. Its anti-bacterial properties also make it popular in the
medical industry. Less than 10% of the gold mined is used for industrial
purposes, but in the case of silver the number is 50%. These applications
create a fundamental demand for silver, the intensity differing over various
economic cycles with higher demand during boom times.
Investors
can diversify by investing atleast 10% of their portfolios in
low-risk assets like silver, gold, etc. This will reduce the overall risk
exposure in their investment portfolio.
GOLD
1. Physical Gold:
The price of physical gold varies by geography. It’s a traditional method of
investment, but storing and insuring physical gold can be cumbersome and
costly.
2. Gold ETFs (Exchange-Traded Funds):
Gold ETFs are financial instruments that hold gold bars, with each share
representing a portion of that gold. These ETFs invest in gold bullion or
futures, with prices that closely track the price of gold, although minor
deviations due to tracking errors may occur.
- Advantages: Gold ETFs are more
transparent, liquid, and closely aligned with market prices than physical
gold. They can be bought and sold online and held in Demat form. One unit
of a Gold ETF typically equals one gram of gold. They also have lower
costs, with annual charges including brokerage and an expense ratio
ranging from 0.50% to 1.00%.
- Taxation: Earnings from ETFs are
taxed according to the investor's income tax slab, irrespective of the
holding period.
- Liquidity: Gold ETFs are highly
liquid and can be traded freely without a lock-in period, making them
suitable for short, medium, or long-term investment objectives.
- Purity: 0.999 purity gold
bullion is the underlying asset of gold ETFs.
3. Gold Mutual Funds:
Gold mutual funds are open-ended funds that invest directly or indirectly in
gold assets. Unlike Gold ETFs, the value of one unit in a gold mutual fund
doesn’t correspond to one gram of gold.
- Investment
Method: You
can invest in gold mutual funds through SIPs (Systematic Investment Plans)
starting from as low as Rs. 500, or via a lump sum. The returns are linked
to the performance of physical gold, gold ETFs, or gold-related
securities.
- Types: Examples include gold
mining funds and gold funds of funds (FoFs). Gold FoFs invest in units of
Gold ETFs, and you don't need a Demat account to invest.
- Costs: Gold mutual funds have
an annual expense ratio between 0.6% and 1.2%, which includes management
fees and ETF fees. Redeeming gold mutual funds within a year may incur an
exit load of 1-2%.
- Liquidity: Gold mutual funds are
more liquid than Gold ETFs in India, as they can be quickly bought or
sold.
Comparison: Gold ETF vs. Gold Mutual Fund
4. Sovereign Gold Bonds (SGBs):
SGBs are government-backed securities denominated in grams of gold. Investors
pay cash for the issue price and hold the bonds for a specific period. Upon
maturity, the bonds can be redeemed for cash equivalent to the prevailing gold
price.
- Interest: SGBs offer a fixed
interest rate of 2.50% per annum, which is tax-free if held until
maturity.
- Purity: The issue of sovereign
bonds is based on 24 carat gold price of 99.9% purity gold.
- Security: SGBs are a digital
asset stored in a Demat account, eliminating the risk of theft.
- Lock-In
Period: SGBs
have a lock-in period after which they can be redeemed. The redemption
price is based on the average closing price of gold (99.9% purity) 3- days
prior to the redemption date.
- Minimum
Investment: The
minimum investment in SGBs is one gram of gold.
Unlike physical gold, SGBs do not carry the risk of theft and are a more secure and tax-efficient way to invest in gold digitally.
Silver ETF
Investment Exposure:
A
Silver ETF is an exchange traded fund, listed on the National Stock (NSE)
Exchange and Bombay Stock Exchange (BSE). The ETF invests in 99.9% purity
physical silver and may also participate in Exchange Traded Commodity
Derivatives (ETCDs) with silver as the underlying commodity. These ETF
units are held in a demat account. So, one can buy, sell or trade these units
at ease during any time of the trading hours just like stocks.
Silver
ETFs track the spot price of silver in the open markets. Fluctuations in the
price of silver will change the NAV of these ETFs. Each unit of a silver ETF
represents 1 gram of physical silver and is stored in a secure vault by the
Asset Management Company.
The
fund managers must obtain auditor reports on physical verification of the
silver stored in vaults at regular intervals.
Features of Silver ETFs
· Purity:
The underlying of silver ETFs
is 0.999 purity silver bullion.
· Taxation:
Silver is a capital asset. An individual’s
investment in bullion attracts long-term capital gains tax if held for more
than 36 months. In such a case, gains from silver are considered taxed at a
flat rate of 20%.
However,
if the investor’s holding is for less than 3 years or 36 months, profits are
treated as short-term capital gains and are added to the regular income, which
is taxed as per the respective tax slab.
·
Tracking Error: Tracking
error is the difference between the returns of a scheme and that of an
underlying benchmark. Fund houses must keep their tracking error within a range
of 2%. If it exceeds 2%, the fund houses must mention tracking error percentage
on their portal.
·
Expense Ratio:
SEBI
has mandated that fund houses cannot charge more than 1% of the Silver ETF
scheme’s assets under management as the expense ratio.
Gold ETF vs. Silver ETF: Where Should You Invest?
If
you’re more conservative investor with a low appetite for risk, consider
investing in gold ETFs due to their relatively stable nature. For more
risk-aggressive investor with a high tolerance for volatility, silver ETFs is a
choice.
Author
Thakur Ajit Singh
Founder - Quick Turtle | Graded Financial Services | AskCred
Financial Expert | Trainer | Management & Placement Consultant
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