Dhanteras is around the corner! If you’ve been planning to buy new silver or gold articles or any metal-made product, then this is the most auspicious day to buy. According to the tradition, buying new gold or silver items on Dhanteras will lead you to the path of prosperity and good luck. If you’re an investor, Dhanteras is of special significance for you as well. Buying gold or silver during the special ‘Muhurat’ has become a tradition for investors. It’s considered auspicious to invest in these metals on this day.

Gone are the days when investors had to buy physical gold or silver. Today, you have the choice of buying them electronically. No headache of keeping physical gold safe! You don’t even need to buy digital gold! You can invest in gold or silver in the form of:

• Gold or Silver ETF
• Gold funds by various mutual funds
• Sovereign Gold Bond

What Is a Gold Mutual Fund?

There are lakhs of investors like you who want to buy gold digitally. To cater to the specific needs of investors like you, mutual funds have come up with gold funds. These gold funds invest in gold assets either directly or indirectly. The price trend of physical gold assets is reflected in the Net Asset Value of these gold funds.

However, do keep in mind, that buying 1 unit of a gold fund does not mean that you have bought 1 gram of digital gold. Gold funds can also invest in gold ETFs and other assets.

Taxation

The recent 2024 budget has changed taxation on gains from gold mutual funds. Now, if you sell the units of your gold mutual fund investment 2 years after buying, the profit will come under Long-Term Capital Gain and it will be charged at 12.5% without indexation. If the units are sold within two years, the profit will come under Short-Term Capital Gain and it will be added to your taxable income and taxed at the applicable rate. This change will come into effect after March 2025. Until then, the old rule of LTCG @ 20% + 4% cess (if units are held for at least three years) remains in effect.

Gold ETF

Gold ETF is an exchange-traded fund (ETF) that tracks the price of physical gold. They are passively managed funds that usually invest in gold bullion or futures.

You might be wondering about the benefit of investing in Gold ETFs versus gold mutual funds. Well, Gold ETFs are traded on the stock exchange and you can buy and sell them flexibly, just like the stock of a company. 1 unit of gold ETF equals 0.01 gram to 1 gram of physical gold - depending on the fund house offering it.

The fund manager purchases gold and deposits it with the custodian of the mutual fund. Both the price and return of gold ETFs are identical to physical gold. Additionally, purchasing a gold ETF has lower costs. If you are planning to purchase gold as an investment, not as an ornament, then a gold ETF is more appropriate as it is easier to buy and sell.

Taxation:

If you sell gold ETF units after 12 months, your profit will be under Long-Term Capital Gain and taxed at 12.5% with no indexation.

If you sell gold ETF units within 12 months, then your gains will come under Short-Term Capital Gain and it will be added to your taxable income and taxed at the applicable slab rate.

Difference Between Gold Mutual Funds and Gold ETFs

You might be wondering which of these two is appropriate for you. For that, let’s find out the difference between the two:

• Investment Method: You can invest in gold mutual funds via SIP. It provides a disciplined way of investing in this asset. You can even automate this SIP. As far as ETFs are concerned, you have to invest in gold ETFs just like you buy a share from the exchange. You can, theoretically automate the process, but it is not as user-friendly as SIP. Both gold mutual funds and gold ETFs allow a lump sum to be invested in one go.
• Need For Demat Account: Gold mutual funds do not require a Demat account. However, if you want to invest in a gold ETF, you need to have a Demat account.
• Minimum Investment Amount: Both gold mutual funds and gold ETFs allow you to start your gold investment journey with as low as Rs.500. For gold ETFs, the amount can be even lower.
• Transaction costs: The yearly cost of gold ETFs is around 0.5–1%. The key expenses are the brokerage, expense ratio, and other charges. The annual closure price of gold mutual funds is between 0.6 and 1.2%. It includes the 0.1-0.2% management fee and the ETF fees. With gold ETFs, there are no exit costs. However, if you redeem a gold fund within a year, you may have to pay an exit load of 1-2%.

Sovereign Gold Bond:

If you are an investor who is tired of volatility, then Sovereign Gold Bond is perfect for you. SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. You pay the issue price in cash and when SGBs mature you get your capital back in cash.

SGBs are one of the safest investment options in India. It is backed by the Government of India and issued by the Reserve Bank of India. What’s more! The capital gains generated by SGB are completely tax-free!

Features of SGB Investment:

• Govt.-backed gold bonds
• 2.5% annual interest, paid every 6 months (this interest is not tax-free)
• Zero capital gains tax on maturity
• 100% secure & free gold storage

How does it work?     

• Apply to an open series.
• SGBs will be credited to your demat account.
• Earn interest while you holdReceive 2.5% interest per annum (paid  semi-annually)
• Enjoy tax-free maturity

So Which One Among These Options Is Right For You?

For long-term investors with a lesser risk appetite, SGB offers a safe volatility-free investment option. Your principal is never at risk! On top of that, you get 100% tax relief on the capital gain.

However, for medium-term investors, ETFs are better as the finance minister has reduced LTCG on the gains. When you sell ETFs after 12 months you have to pay LTCG at just 12.5% albeit without indexation benefits.

However, never even think about investing in physical gold! You can buy a physical as a wedding anniversary gift for your better half! But as an investment vehicle, investing in physical gold is a strict no-no due to high holding costs and making charges.

-Debraj Guhathakurata