Should I buy SGB for long-term goals like my kid’s wedding?

SGB (Sovereign Gold Bonds) are a good option for long-term goals due to higher returns and tax benefits. However, they have limitations like maturing in 8 years and being digital certificates that need conversion to physical gold.

How does buying Physical Gold work?

Depending on the budget, setting up a schedule for purchasing physical gold like bars, biscuits or coins is feasible. Smaller purchases may lead to higher prices per gram due to making charges. There’s a GST of 3% on each purchase, plus an additional spread due to making charge.

What should I know about Physical Gold for accumulation?

When selling gold, you’ll receive the prevailing day’s gold price only, losing the making charge and GST. Jewelry is generally not suitable for accumulation due to lost making charges upon conversion and limitations in buying small amounts regularly.

What are Gold ETFs and how do they work?

ETFs are investment funds traded on stock exchanges and can include assets like physical gold bars. Purchasing Gold ETFs through a Stock SIP (Systematic Investment Plan) via your broker is recommended for long-term investment.

How do Gold Mutual Funds differ from ETFs?

Gold mutual funds also invest in physical gold bars but have their own expense ratio on top of the ETF’s cost. Unlike ETFs, mutual funds are available for purchase at NAV (Net Asset Value).

What's the tax implication for these gold investment options?

Physical gold doesn’t have tax implications if used for jewelry. However, Gold ETFs and mutual funds are subject to capital gains tax at slab rates for units purchased after April 1, 2023. Transferring/gifting units to a child may help save tax if they are in a lower tax bracket during sale.

What’s the recommended choice for accumulating gold for a wedding over the years?

Buying physical gold for a wedding over the years seems a better option compared to ETFs and mutual funds due to tax benefits and potential savings when used for jewelry.

« Wall Street or Dalal Street: which is the best option for US NRIs to invest in Indian stocks based on PFIC rule? Building Generational Wealth through an Alternative Retirement Portfolio Planning Technique »

How to accumulate gold for a child's wedding without buying SGB?

Q: What are the alternatives to SGB for accumulating gold?

Three main alternatives to SGB are Physical Gold (Purchasing gold bars, biscuits, or coins, but it may incur higher prices due to making charges), Gold Exchange Traded Funds or ETFs (Traded on stock exchanges, offering investment in physical gold bars) and Gold Mutual Funds (Investing in physical gold bars through mutual funds, subject to an expense ratio).

Posted on 03 Dec 2023
Author: Sayan Sircar

Tags: Gold ; Children

7 mins read
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This article gives the solution for buying small amounts of gold over the years in case buying SGB is not an option.

How to accumulate gold for a child's wedding without buying SGB?

This article is a part of our detailed article series on accumulating gold over time for a child's wedding in the future. Ensure you have read the other parts here:

What is the best way to accumulate gold for your child's wedding?

This article shows you how to buy gold in small amounts over years for a child’s wedding goal.

What will create a higher corpus for children's marriage: buying physical gold vs SIP in stocks

The article shows you if you there is a better alternative to buying gold over time for your child’s marriage goals.

📚 Topics covered:

Should you buy SGB for long-term goals like kid’s wedding?
What are the alternatives to SGB for accumulating gold?
Option 1: Physical Gold
Option 2: Gold Exchange Traded Funds (ETF)
Option 3: Gold Mutual fund
The tax angle will make a considerable difference in returns and therefore choices

Should you buy SGB for long-term goals like kid’s wedding?

This article is Part 2 of our post on purchasing gold over the years for a child’s wedding. You can read the previous part here: What is the best way to accumulate gold for your child’s wedding?.

We had concluded that SGB is a good option for this purpose. SGB gives the highest returns of all types of gold investment and is tax-free as we have discussed here: The Ultimate Guide to Which Type of Gold Gives the Best Returns. However, SGB has two main shortcomings that we need to overcome in our hybrid approach:

SGB is a digital certificate that promises you will get the return of gold. You need to, at one point, sell the SGB or have it mature to buy the actual gold
SGB matures in 8 years. You need a way to renew your matured SGB if the wedding date is still some time away

Also, NRIs are not allowed to invest in SGB. Therefore we need to discuss another solution here.

We will aim to have the highest amount of gold that we can get for our money by

having the option that has the lowest capital gains tax
invest only in regulated and well-established schemes
the cheapest way to hold gold with the lowest spread
requires least payment of GST and other charges

What are the alternatives to SGB for accumulating gold?

Gold Options For Wedding

There are 3 main options if you do not want to buy SGB:

physical gold via bars, biscuits and coins
gold Exchange Traded Funds (ETF)
gold mutual funds (most of these invest in ETFs of the same AMC)

We will not discuss digital gold as a product since it is not SEBI regulated.

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Option 1: Physical Gold

Depending on the monthly budget, you can setup a schedule for buying physical gold. Generally, smaller the purchase amount, the higher is the price per gram due to making charges. So if your target is to buy an average 2 grams/month, you will be better off, price-wise, so buy a 10-gram coin every 5 months than two 1-gram coins every month.

There will be 3% GST on each purchase and a spread above that (around 3% more) due to making charge. So if the price of gold is ₹6000/gram, then the price of a biscuit will be at least 6% more i.e. ₹6,300/gram. When you use this gold directly to make jewellery, then there is no tax.

You should know that when you sell gold, you will get that day’s gold price only. The making charge and GST is lost.

You should know that generally jewellery is not suitable for accumulation due to:

making charges lost if the item is converted again at the time of the wedding
not possible to buy in small amounts every month

Option 2: Gold Exchange Traded Funds (ETF)

What is an ETF?

As per Wikipedia, an exchange-traded fund (ETF) is a type of investment fund that is also an exchange-traded product, i.e., it is traded on stock exchanges. ETFs own financial assets such as stocks, bonds, currencies, futures contracts, and/or commodities such as gold bars.

Here we are interested in ETFs that invest in physical gold bars and are available to purchase in NSE / BSE. The easiest way to buy Gold ETFs for a long-term investment is via a Stock SIP. You can read more on the concept of stock SIP here: What is a stock SIP? Should you have one?.

Option 3: Gold Mutual fund

A gold mutual fund invests in bars of physical gold instead of stocks or bonds. Typical gold mutual funds in India invest in the ETF of the same AMC. Gold mutual funds have their own expense ratio on top of the ETF but are available for purchase at NAV unlike the ETF whose price, that you buy/sell for in the stock exchange, will be different, and usually lower, than the NAV.

We have a guide on choosing gold mutual funds here: How to choose a gold mutual fund?.

The tax angle will make a considerable difference in returns and therefore choices

Just like SGB, physical gold does not have any tax if you make jewellery out of it. However, both Gold ETFs and mutual funds, though convenient to purchase, will have capital gains tax at slab rates for all units purchased after 1-Apr-2023. You can of course transfer the units to your child who can then sell it themselves and save tax if they are at a lower tax bracket, albeit unlikely, compared to the parent at the time of the wedding.

Therefore, compared to the other choices, buying physical gold for a wedding, over the years, is the better option compared to ETFs and mutual funds.

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