I want to buy at least 40 grams of jewellery for my marriage in the next two years. What will be the best option for me to invest for a short-term goal like this? Should I buy a gold ETF, mutual fund or is there a better option available?
I would suggest you to invest in Sovereign Gold Bonds (SGB), through secondary markets, due to the inherent advantages of SGB over Gold ETF or Gold Funds. In addition to the scope of capital appreciation, SGB offers an interest income of 2.5% p.a. to its investors on the nominal value of their investment, a feature not offered by Gold ETFs or Gold funds. The accrued interest is credited to the investor on a half-yearly basis. Being issued by the Government of India, the interest income accrued from SGB is covered by sovereign guarantee, the highest form of income protection available to any investor.
As the capital gains realized on holding SGB till its maturity is fully tax exempt, purchase SGB maturing in October 2025 from the secondary markets and redeem them on maturity. This should save you from incurring capital gains tax on your investment. Even if you redeem SGBs before their maturity, it will still offer higher tax efficiency than Gold ETFs or Gold mutual funds. Being a listed bond, redeeming SGB within 1 year of investment would attract short term capital gains tax as per the tax slab of the investor while redemptions after 1 year of investment would attract long term capital gains tax @20% with indexation. In case of gold ETFs/funds, the realised capital gains are taxed as per the tax slab of the investor irrespective of the holding period.
As each unit of SGB is equivalent to 1 gm of gold, you can purchase 40 units of SGB with October 2025 expiry through your trading account, either in lump sum or in tranches as per your investible surpluses. You will receive your redemption proceeds in your linked bank account on the date of maturity. The redemption price of each SGB unit would be the simple average of the closing price of gold of 999 purity of previous 3 business days of the date of maturity, as published by the India Bullion and Jewellers Association Limited. Thus, even if you incur capital loss due to the fall in the gold prices, the redemption proceeds of your SGB units should allow you to purchase 40 grams of gold on the date of the maturity for your jewellery.
As published in Economic Times on September 10, 2023