All Indians have a special affinity to gold. For the lower and middle class, it may be in the form of jewelry only and for higher income Indians and HNIs it may be a part of asset diversification. Many of the millennials do not have a love of gold jewelry β not because it has become expensive or higher costs. For them light artificial jewelry is the fashion.
Gold Choice
Gold Mutual Fund, Gold Exchange Traded Fund (ETF), Physical Gold (Bars, Coins) and Gold Sovereign Bonds (SGB).
Gold jewelry should be considered more as a wearable or as a social security for the lower class and is easy liquidate in case of emergency.
ETF and SGB are considered the low-cost instruments as there are no making charge, wastage or storage and insurance costs. Allocation to ETF and SGBs are considered only as a part of allocation to long term portfolio. The purity of gold in both the options is 999.
Shariah-compliance guidelines for investment in Gold
SGB are interest (2.50%) bearing instruments and long-term investment instruments with less or no liquidity. The SGB offers 2.50% p.a. interest that is paid semi-annually on the original investment value.
The cost of Gold Mutual Funds is generally higher than that of ETFs and therefore ETF is a preferred option for investment. Not all gold mutual funds and ETFs are shariah-compliant although the investment is either in gold or cash. However, the cash amount being parked in interest-earning money market instruments can make it non-compliant. Some of the mutual funds also lend gold to banks in line with the relaxation given by government to reduce gold imports in the country. Hence it is important to check shariah status of gold funds and ETFs like stocks.
Another important consideration while choosing the investing instrument is liquidity. In case of quantitatively higher allocations, one should also consider a fund or ETF with higher assets under management.
Taxation
Investment in any gold asset for less than 36 months is considered as Short-term and investment for more than 36 months is long-term capital gains. The tax rate for short term capital gain tax is as per slab rate and for long term it is 20% (plus any cess) with indexation.
The interest rate of 2.50% in case of SGB is added to the total income under βIncome from other sourcesβ and taxed at slab rate.
Conclusion
Shariah-compliant investors can allocate 10-30% of gold in their portfolio. The pie of gold should grow when the overall return on the portfolio is above 15% per annum. The higher allocation is recommended as an alternative to debt and hedge against the equity.
The points to be considered in selection of mutual fund or ETF would be shariah-status and AUM for easy liquidation.
