Gold has always been considered a hedge against inflation and an insurance against global uncertainty. Most Indians buy physical gold for investment purpose. For those not wanting to invest in physical gold, there are gold exchange traded funds (ETFs), and gold mutual funds. In addition to these existing schemes, the government last week has launched two mega gold-related investment schemes---gold monetisation scheme (GMS) and the gold bond scheme. The purpose is to mobilise the surplus gold holdings held with Indian households and institutions and reduce import dependence. Indians directly or indirectly hold an estimated 22,000 tonne of gold ($800 billion n or 39 per cent of India’s GDP). Incremental gold demand in India is largely met by imports (1.7 per cent of GDP in FY15), driving current account deficit (1.4 per cent of GDP).
Here are the pros and cons of the two schemes to help you decide whether you should go for it:
Gold bond scheme
This scheme is open for investing from November 5-20. The bonds will be issued on November 26, 2015. The sale of sovereign gold bonds will be done via banks and post offices. This is the first tranche of the gold bond scheme and subsequent tranches would be notified later. Facility to invest in the bonds online will also be launched shortly.
Issue price of gold bond scheme: The Reserve Bank of India (RBI) has fixed the issue price for the first tranche of sovereign gold bonds at Rs 2,684 per gram of gold.
Interest rate: The bonds shall bear interest at the rate of 2.75 per cent (fixed rate) per annum on the amount of initial investment payable semi-annually. The redemption price is linked to 999 purity published by India Bullion and Jewellers Association (IBJA).
Maturity: The tenor of the bond will be for a period of eight years with an exit option from the fifth year to be exercised on interest payment dates. These bonds will be tradable on exchanges.
Subscription: The bonds shall be denominated in units of one gram of gold and multiples thereof. Minimum investment in the bonds shall be two grams with a maximum subscription of 500 grams per person per fiscal year (April – March).
Taxation: Interest earned on gold bonds would be taxable and capital gains tax would be levied in the case of physical gold. If you fall in the category of 10 per cent tax rate, you will benefit by a post-tax return of 2.47 per cent. But if you are an investor with 30 per cent tax rate, expect 1.9 per cent post-tax return. If you transfer gold after holding it for 36 months or more, around 10-20 per cent tax will be applicable after indexation. For short-term gains below 36 months, gains are added to income.
Eligibility: Only Indian residents are allowed to invest in sovereign gold bond schemes. The investment can either be done individually or jointly or in the name of minor as well. This investment can be held in paper, certificate or in a demat form. In case of joint holding, the investment limit of 500 grams will be applied to the first applicant only.
Other details: The investors in the gold bond scheme will be issued a stock/holding certificate. Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time. The commission for distribution shall be paid at the rate of one per cent of the subscription amount.
Pros of Investing in gold bond scheme: Since the bonds will be issued by the central bank, they are secure. These bonds are free from issues like making charges and purity, which is of concern while you buy gold in jewelry form. Also there is no risk and cost of storage, since these bonds will be held in demat form, unlike physical gold. These bonds are a better alternative to gold ETFs as there are no recurring annual expenses in these bonds. Gold ETFs and gold mutual funds have a fund management cost of around 0.50-1 per cent
Cons of gold bond scheme: Experts said the biggest drawback of this scheme is that it does not permit withdrawals before completion of five years. Pankaaj Maalde, a certified financial planner said: “The scheme is close-ended and is not liquid. If an investor needs money during the tenure, he can’t withdraw before completion of five years. Liquidity is not always required for unexpected emergencies, but is also needed when your investment is not performing well compared to other options or to rebalance the portfolio as per the desired asset allocation.”
While bonds will be tradable on exchanges from a date to be notified by RBI, if a person needs to sell these bonds before maturity, there may not be enough liquidity on the exchanges.
Another drawback is that the scheme does not permit investing through systematic investment plan. “SIPs in gold fund always reduces the overall risk over a period of time and gives you advantage of rupee cost averaging. Charges in the gold fund are higher than gold ETFs, but the brokerage per transaction and the demat charges payable in gold ETFs reduces the gap between the gold ETFs and gold fund charges,” added Maalde.
In case of sovereign gold bonds, both upside gains and downside risks will be with the investor. However, in case gold prices fall, losses from a systematic investment plan in gold exchange traded funds or gold mutual funds will be lower than for lump sum investments in sovereign gold bonds.
Gold monetisation scheme
The gold monetisation scheme will basically replace the existing gold deposit scheme, 1999. It consists of a revamped gold deposit scheme and gold metal loan scheme. In a bid to create competition, all scheduled banks have been allowed to implement the scheme. Regional rural banks being weak have been excluded.
Interest rate: Investing in gold monetisation scheme can help you earn up to 2.50 per cent interest rate on idle gold. Interest rate on medium and long-term government deposit is 2.25 per cent and 2.20 per cent, respectively. Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier.
Tenure: The deposit tenures are of three types- short term of one to three years, a medium term of five to seven years or a longer term of 12-15 years. The short term deposits of gold will be accepted by banks on their own account, while the medium and long term deposits will be on behalf of government.
Minimum deposit: The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme.
Eligibility: Resident Indians (Individuals, HUF, trusts including mutual funds/exchange traded funds registered under Sebi (mutual fund) regulations and companies) can make deposits under the scheme.
Process: The gold will be accepted at the collection and purity testing centres (CPTC) certified by the Bureau of Indian Standards (BIS) and notified by the central government under the scheme. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold. The principal and interest of the deposit under the scheme will be denominated in gold.
Withdrawal: There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks.
Grievance redressal: Complaints against designated banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption of deposits, payment of interest will be handled first by the bank’s grievance redressal process and then by the Reserve Bank’s banking ombudsman.
Cons of GMS: The GMS scheme envisages holding gold only in its pure form, resulting in the melting of the deposited jewellery and ascertaining its pure gold value. This will be a disincentive for a large number of households who generally want to keep gold in the form of jewellery and may not want to see their family-inherited, emotionally attached, piece of gold lose its identity for meagre returns.
According to India Ratings and Research, “Also, the jewellery making charges paid at the time of buying it will be lost in the process. Moreover, ascertaining of pure gold out of the jewellery will often result in lower valuation of the gold held by households. First, the loss of jewellery making charges and secondly lower valuation together will be a double whammy for households. There is also lack of clarity on the tax treatment, on the conversion of physical gold into the gold deposit scheme.”
Chirag Mehta, senior fund manager-alternative investments, Quantum AMC, said: “The option to select the mode of repayment at the time of deposit may be done away with as customer would not know that 8-10 years down the line, would they require gold or cash. The depositors should be given the option at maturity to select the mode of repayment.”
Ashok Minawala, director, All India Gems & Jewellery Trade Federation, said, “For GMS, the government has presently proposed around 125 of 350 Hallmarking centres to be the collection centres as well as assaying centres in only 14 cities of the country, while the need is to be present in over 300 cities.”
“The industry has already been facing major challenges from the BIS authorised hallmarking centre’s who are the extended arms of BIS but in turn are also a heartburn for them as well since they are all outsourced and not very reliable in the delivery on quality assured by them as over 70 per cent of hallmarked jewellery still continues to fail to stand on their marking standards. BIS is continuously monitoring the operations but lacks a proper way of managing the same,” added Minawala.
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