The Money Matter
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The Money Matter

Investing Handbook for Indians: Chapter 5

Everything you need to know before making your next Golden purchase.

My father tells me, he started saving for my marriage since the week I was born. He kept buying gold(as biscuits or ornaments) every year. My grandparents, both maternal and paternal gifted infant me baby jewellery while blessing me for the first time. I remember our house help lady would save up and deposit amounts like 100–200-500 rupees with a local jewellery maker and buy the lightest but a golden pair of earrings.

Gold is auspicious. Gold is important.

All across the Indian subcontinent, holding gold is a sign of prosperity and pride. From gifting gold ornaments to bulking on gold biscuits as investment, India loves gold. We are one of the oldest civilizations, have the smartest people in the country and gold has been known to mankind since the early days of barter trading. Gold was there since day 1 and has seen it all.
Despite everything, majority of the money invested in gold does not get deployed to its full potential.

By now you might have guessed where this is going.
Buying gold cannot stop. We need to revamp our methods. Let us navigate the current scenario and decide what is the best way to deploy our corpus allocated to gold. For those who are in their 20s and early 30s, those who might not be thinking about buying gold right now, we have something for you too. Let’s get started.

Source: Google Images

Identify your Purpose.

  • Are you buying an ornament?
  • Are you investing?

If you’re in the former category, please go ahead and make that purchase. Happy Shopping!
The latter you say? Well, in that case, let’s continue reading.

Moving past ‘Made of Gold’

Gold biscuits and gold in digital wallets have brought you a step ahead. By not buying the ornament, you have saved on the making charge. Yes, we all know how painfully high that amount is. Good job, but this is not even close to the most optimum gold solution.

  • You saved on making charge.
  • You need to store the physical gold for which you will be paying locker rentals.
  • Buying biscuits(each of 100gms) are a big upfront investment.
  • Digital gold is relatively better an option where the digital wallet guarantees purity(99.999%) and quality with almost instant transactions. They charge for storage too.

Sovereign Gold Bonds or SGBs

The beautiful alternative by Government of India

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
SGBs are issued by Reserve Bank on behalf of Government of India.

Defining SGBs w/o the jargons:

  • GOI via RBI issues bonds for gold.
  • These bonds are equivalent to 1g of gold.
  • You can purchase multiples of such 1g bonds.
  • There is no physical gold = No locker charges.
  • You buy and sell these bonds at gold market price.

So, that covers all the benefits of buying and holding gold without having to go through all the hassle physical gold brings.

Where & How do you Buy/Sell these?

  • RBI releases SGBs in tranches i.e. dates in the calendar year with purchase windows. I use my bank’s website to check for upcoming issues. Your bank mobile app will also notify you beforehand.
    [I use my bank’s website: SGB Tranche dates ]
Source: Groww.in
  • You could walk up to your nearest Bank or Post Office, fill up a request form, pay the amount and on the date of issue, you will get a physical and digital copy of the certificate of holding. Here’s what it will look like:
  • Alternatively, if you have a DEMAT account, you can hold the SGBs in your portfolio. Since I buy all through the tranche, I prefer holding the bonds in the demat account I have and use the Kite(by Zerodha) App as the one stop for all my gold investments.
    [Disclaimer #1: Zerodha is my personal preference not suggestion.]

You can get a demat account with any broker of your choice for amounts as low as 200–300 rupees. I would strongly suggest taking this simple path. The app will log and manage all your SGB purchases with a simple click.

One stop snapshot of some SGB holdings on Kite App
  • When you buy online (via banking apps), an additional discount of Rs. 50 can be availed. Grab this!

How’s the liquidity?

  • These bonds are issued for a period of 8 years and a lock in of 5 years.
  • This means you can only sell it on and after completion of 5 years and hold it for a maximum of 8 years.

Since we are looking at SGBs as an investment option, 5 years is a doable tenure. Which brings be to
[Disclaimer #2: Do not put your emergency money in SGBs.]

Let’s talk what we hate: Taxations

  • Your purchase is tax free. NO TDS!
  • Only the interest earned on selling these bonds are taxable after applied indexation. (which equates to a small amount)
  • Online purchase of SGBs get a 50 rupees upfront discount.

What if I tell you there is more? Yes, this is not the end of it. There are a lot more to SGBs that will interest you.

That brings us to: Interests

  • The price of gold keeps increasing as there is only a limited amount of this commodity and more and more people want to buy it.
  • You can buy SGBs for a minor with a guardian.
  • To that, SGBs pay annual interest. 2.5% pa. You heard me right.
Gold price movement 2018–22. Source: Google

As you can see here, from being valued for Rs. 30,000/- in 2018, gold is currently(mid-2022) trading north of Rs. 52,000/-. Over and above the fact that world markets have ingested a pandemic in this phase.

We still have some pain points to address……

While gold is a great investment and hedging option for our portfolio & SGBs are a marvellous avenue to invest in gold, there are few drawbacks to it:

  • Liquidity: Lock in period of 5 years.
  • Investment corpus: You have to invest in multiples of ~5k.
  • Holding limit: Every individual can hold a max of 4kgs.

Unlike big corporations, retail investor like you and me might not have the appetite for this. For people who can only plan to invest 10k a month or if you are someone who is just getting started with 5k, putting all or majority of your money in gold makes zero sense.

Here’s something I have been saving for the end: Gold ETFs.

Gold meets Mutual Funds = Gold ETFs

Gold ETFs or Gold Mutual Funds:

  • Funds that primarily invest in gold bullions(gold metal) or in stocks and bonds of gold mining/manufacturing companies.
  • Their unit prices are inline the market price of gold.
  • You can get all the benefits of gold investment with convenience.

Reasons Gold ETFs are so attractive:

  • Almost every fund house has a gold fund.
  • Returns are similar to SGBs.
  • DEMAT account not required.
  • There is no upper cap on the investing amount.
  • Highly liquid. There is no limit on the amount you want to redeem & the entire amount will be credited to your account in a few day’s time.
  • You can add gold to your portfolio with SIPs as low as Rs.500/-
  • No need to track tranche dates. Invest by habit through SIPs.
Source: ETMoney.com

Good to know points for gold investing:

  • Gold is a commodity and you should use it for diversifying your portfolio.
  • Gold is for hedging risks on your portfolio and not fetching big return.
  • Equity markets inversely affect the price of gold.
  • The returns are incompetent to any other market instrument. Do not put a big % of your corpus here.
  • It’s an absolute zero risk instrument.
  • Hoarding physical gold will erode your money: inflation + making charge + taxes on purchase + interest lost.

That being said, I hope a lot of questions have been answered around this commodity. Hopefully, this will help you make better choices with your money.

Other resources:

I am so glad we have made it this far. Thank you for your patience & time.
Stay tuned with The Money Matter & hit the Follow button to get notified about our upcoming chapters.

If you haven’t already read the previous chapters, find them here:

  1. Chapter 1 will get you started with making money work for you
  2. Chapter 2 helps you stay on step ahead of emergencies
  3. Chapter 3 to get a better grip on finance jargons
  4. Chapter 4 gives you a wholesome understanding of credit cards

Here are some more reads I believe you would find interesting:

  1. Get Finance Healthy
  2. Building the Future starts NOW
  3. Fixed Deposits: The Horror
  4. Understanding Mutual Funds

Where can you find me:

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Pronomita Dey

Pronomita Dey

Personal Finance & Lifestyle Blogger