Should you invest in Sovereign Gold bonds scheme by Government of India. We compare them with Gold ETFs, physical gold and bank fixed deposit below.
Any investment decision a trade-off in terms of returns, taxes, holding periods. Consider these options for investment in gold:
Gold bonds: You get 2.75% (which will be taxed) and at maturity you will get returns according to change in value of gold over the period. But there would be a lock-in period and you will not be able to sell the bond if you don’t have a liquid secondary market for gold bonds (you should expect that there won’t be).
Physical gold: Typical problems associate with physical include purity issues and problems with selling it as you might not get fair value. But ignoring all this for now, you would esentially get returns based on change in gold prices. You will be taxed in the same way as gold bonds or ETFs (20% post indexation for Long term investment i.e. after holding for 3 years)
Gold ETF: You get returns based only on change in price of gold. Taxation treatment is the same. You pay fund expense so your return is a little less than the return on gold prices.
What is common in all these options is that if 5 years down the line gold prices go down you will lose money on your capital. (Not many consider this a possibility, which is a mistake because gold prices can go up and down)
Based only on returns you see that gold bonds is the best option among these. But understand that you will be locked in and won’t have a liquid secondary market to get out in all probability. I would say if you want to invest in gold and are sure you wont need this money over long term put it in gold bonds (most of physical gold in households anyways is never sold, people love their gold).
Comparison to FD: If you invest in 5 year FD, interest will be taxed returns are say 8.24%. The question you need to answer is:
Do you expect gold prices to go up more than 8.24 minus 2.75 ( =5.49%) year on year for 5-8 years?
If yes go for gold bonds, if not stay with fixed deposits.