Every year, during the auspicious occasion of Akshaya Tritiya, there is a frenetic rush to jewellery shops to buy gold. Indians have been purchasing ornaments and coins on this day not just for religious purposes but also as a means to accumulating wealth over the years. However, sticking to physical gold may not be the right choice any longer. Isn’t it time for investors to tap other avenues, especially the more convenient paper gold? The answers to these questions depend on what you need. So let us take a closer look at the advantages and disadvantages that are associated with each form of gold.
Most traditional buyers opt for jewellery because they consider it the only form of gold that offers utility. However, gold ornaments don’t offer good investment value. This is because there are additional charges, such as making charges (more than 15% in most cases) and taxes, that are tacked on. There are also concerns about the purity of the ornaments, which means that you may not be able to recover the full market price if you decide to sell them later. These deductions can be to the tune of 10-20% if purityrelated issues crop up when you sell the jewellery, and may be higher if you go to some other jeweller. So, opt for ornaments only if you want to wear them and not as part of your investment portfolio.
Bars and coins
This is the best form of investment if you insist on buying physical gold. However, here again, you need to take precautions that the bars or coins are pure and come in tamperproof packets. Next, make sure that the mark-up you pay is reasonable; don’t buy if you are being charged a mark-up of more than 5%. The problems you face while selling ornaments may also crop up for gold bars or coins. “Selling bars and coins is easy in a bull market, but it’s difficult to do so in a bearish market,” says CP Krishnan, director, Geojit Comtrade.
In a bear market, jewellers may expect the price to slide further and, therefore, may keep putting off buying gold from you. So, before you go for this option, make sure that the jeweller is willing to buy it back at market price. Currently, banks do not buy back gold bars or coins. However, there are other options that are better than buying physical gold. If you are willing to consider paper gold, you can consider gold exchange traded funds (ETFs) and gold savings funds of funds (FoFs).
In addition to the usual advantages like transparency in pricing and no problems with purity, paper gold also offers several tax advantages. For example, investors need to hold these for only one year to claim long-term capital gain on paper gold, while the holding period is three years for physical gold. The taxation rates are different too. While the capital gains tax for physical gold is 20% after indexation, paper gold investors have the option of selecting their tax rates (10% without indexation or 20% with indexation). Physical gold investors also have to pay wealth tax, while paper gold investors are exempt from it.