Buying gold this Akshaya Tritiya? These instruments add a sheen of liquidity

• Follow

Physical gold is one of the most liquid assets to own. You can easily sell gold in any part of the world and realise close to its market value. This is one of the biggest advantages of owning gold. “Gold as an asset is extremely liquid. Hence, that is an added advantage for investors,” Gnanasekar Thiagarajan, Co-founder and CEO, Commtrendz said.

However, given the constraints of buying physical gold, be it on the occasion of Akshaya Tritiya or otherwise, due to the restrictions placed by many states due to Covid-19 related lockdowns, many would prefer to invest in gold through gold-related instruments such as exchange traded funds (ETFs) and sovereign gold bonds (SGBs). Investors must keep in mind that these investment avenues may not provide the same level of liquidity such as physical gold.

Here are some of the main avenues of investing in gold and how they stack up on the liquidity aspect.

Physical gold or Bullion Gold coins and bars have been a preferred part of investing in gold in traditional Indian households. If you buy bullion manufactured by a reputed refinery like MMTC Pamp, then it is fairly liquid. Tamper proof packaging makes it secure. However, there are few jewelers who sell their own branded coins. They also have attractive packaging. However, these may not be as liquid as those available in tamper-proof packaging and issued by refineries of global repute. Buyers may want to assess the purity before buying them from you.

Gold exchange traded fund Due to risks such as theft and purity, and costs such as insurance and storage, the young generation is going after financial products tracking gold prices. Gold ETF are a preferred avenue. According to Association of Mutual Funds in India (AMFI) as on March 31, 2021 Rs 14,122 crore were invested in gold ETF. Though gold ETF are expected to track the gold prices, not all gold ETF do it efficiently. If you have a large quantity to sell, then you may not get to sell it on exchange. You must buy units of well managed gold ETF with high volumes and decent assets under management. Avoid going after small schemes. Inability to buy or sell near net asset value of the unit can impact your investment returns a lot.

Gold saving fund These mutual fund schemes invest in units of gold ETF. They are a useful vehicle for investors who do not have a demat account or find it difficult to place buy and sell orders on the exchange. You can also start a systematic investment plan in the gold saving funds. These funds offer assured liquidity at the end of day net asset value of the unit. However, you cannot benefit from the intra-day price volatility in yellow metal. If you are keen to take advantage of the intra-day price volatility you have to be investment in gold ETF. But if you are a long term investor then you may be better off by putting your money in a gold saving fund. However, for the additional layer of transaction, you have to pay a bit more in the form of expenses of the gold saving fund, in addition to the expense charged by the gold ETF.

Sovereign gold bond These are issued by the Reserve Bank of India on behalf of the Government of India. These SGB track the price of gold and offer to pay an interest at the rate of 2.5% per year, payable half yearly. Since they are backed by sovereign guarantee, there are many takers for them. You can trade in them on the stock exchange like any other bond or stock. But they are not liquid in the secondary market. Most of the series suffer from low volumes and the trades take place far away from fair value.

If you have a large quantity to sell, then it can be a nightmare. If you are investing in SGB be prepared to hold till at least five years from the date of issuance, after which there is an option to sell it back to the government. If you can hold on to those till the end of eight years – the tenure of the bond, then it is even better. The gains at the time of maturity are tax free in the hands of the investor.

Investors should choose the right instruments to invest in gold taking into account their liquidity needs.