Arthgyaan

Supporting everyone's personal finance journey

The Ultimate Guide to Which Type of Gold Gives the Best Returns

This article helps you choose the right type of gold for your long-term investments since all options do not give the best results.

The Ultimate Guide to Which Type of Gold Gives the Best Returns


Posted on 16 Aug 2023
Author: Sayan Sircar
Tags: Tags Gold ;  Tax
8 mins read
Get new post notifications on WhatsApp!

This article helps you choose the right type of gold for your long-term investments since all options do not give the best results.

The Ultimate Guide to Which Type of Gold Gives the Best Returns

📚 Topics covered:

This article is a part of our detailed article series on the concept of Sovereign Gold Bond (SGB). Ensure you have read the other parts here:

Three options of investing in gold

In this article, we compare the following three options of investing in gold:

We explicitly exclude the option of investing in Digital Gold since it is not a SEBI regulated product. The returns and taxation from this type of gold will be very similar to that of physical gold. Returns from jewellery will be lower than that of physical gold due to higher making charges.

We take the following prices for these options as on publishing date:

999 purity gold from IBJA website

Price Of Pure Gold

Source: https://ibja.co/

Physical gold bar from MMTC-PAMP website

Price Of Physical Gold

Source: https://www.mmtcpamp.com/

SGB price is the average of IBJA last week prices. We assume that:

  • 10 grams equivalent of gold are purchased in each case
  • there is ₹50 discount in the SGB purchase per gram of gold
  • Maturity is calculated at 10% return on physical gold price for 8 years
  • Gold MF/ETF has 0.61% expense ratio (average TER of Gold MF, includes TER of underlying ETF, offerings from 15 AMCs as per July 2023 portfolio filings)
  • Making charge of physical gold is backed out of the Physical gold bar price and the post GST pure gold price
  • Tax slab of the investor is 30% (4% cess will be there and will further reduce the XIRR of physical and MF/ETF options)
  • SGB does not have nay tax on the maturity value
  • CII value is assumed to be 4.44% which is the average of the last 5 year’s CII growth. You can get the latest CII values here: What is the latest Cost Inflation Index (CII) value?
  • Profit is calculated at market value post tax
  • Interest of SGB is reinvested into SGB issuance of future tranches. If we assume that the interest is not reinvested, the SGB return will be exactly equal to the gold price return
Recent articles:
1 / 3
<p>A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.</p>
2 / 3
<p>This article explains the PFRDA announcement about a new default scheme under NPS Tier II for government employee subscribers.</p>
3 / 3
<p>As per SEBI rules, mutual fund investors must have nominees in their folios by 1st October 2023 or explicitly opt out. Otherwise they will face restrictions in selling units.</p>
❮ ❯

Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

Join our community

Cash flows of the three options for XIRR calculation

For each of the three options, we show the yearly cash flows. Since these are cash flows, money going out (original investment, locker rent etc.) are negative while SGB interest and final maturity amount are with positive sign.

Year Physical MF SGB
0 -64,540 -58,898 -58,401
1 -1,200 0 1,031
2 -1,200 0 1,031
3 -1,200 0 1,031
4 -1,200 0 1,031
5 -1,200 0 1,031
6 -1,200 0 1,031
7 -1,200 0 1,031
8 112,198 102,180 126,219

Note: For SGB, there is yearly interest income of 2.5% of the invested amount which is taxable at slab. Here

₹1,031 = ₹58,401 * 2.5% * (1-30%)

Also, ₹1,200 is the locker rent for the bank locker used to store the gold. Of course, this charge will be zero if you already have a locker.

Comparison of the three options

Based on the cash flow calculations in the previous table we show how the three options compare.

Heading Physical MF SGB
Investment 58,898 58,898 58,401
GST @ 3% 1,767 0 0
Making 3,875 0 0
Total Cost 64,540 58,898 58,401
At maturity 126,253 120,730 125,188
Profit 61,713 61,832 66,787
XIRR 5.83% 7.13% 11.30%

Goal-based-investing plan

What are the returns from the three options for different returns of gold?

In the previous example, we had assumed 10% return on gold over the 8-year investment period. We now use the same assumptions and show the returns of the three options for gold price returns ranging from -5% to +10%:

Gold return Physical MF SGB
-5% -4.6% -3.7% -2.9%
-4% -4.0% -3.1% -2.0%
-3% -3.4% -2.4% -1.0%
-2% -2.8% -1.8% -0.1%
-1% -2.2% -1.1% 0.8%
0% -1.5% -0.4% 1.8%
1% -0.8% 0.3% 2.7%
2% -0.1% 1.0% 3.7%
3% 0.6% 1.7% 4.6%
4% 1.3% 2.5% 5.5%
5% 2.0% 3.2% 6.5%
6% 2.7% 4.0% 7.5%
7% 3.5% 4.7% 8.4%
8% 4.3% 5.5% 9.4%
9% 5.0% 6.3% 10.3%
10% 5.8% 7.1% 11.3%

We see that irrespective of the gold price return, SGB gives the highest return of the three options of investing in gold over a 8-year investment horizon.

Why does this result come and how to interpret it?

SGB is the only gold investment option where:

  • there is no tax on the maturity amount. All other investments in gold are taxable on maturity
  • SGB return is guaranteed by the government unlike the rest which do not have sovereign guarantee
  • there is interest income at 2.5% interest, albeit taxable. No other investments in gold gives interest

These two features of SGB makes it the best option to invest in gold purely from a return perspective. Whether it is suitable for inclusion in a portfolio for long-term goals will require understanding of the exact use case.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Worked out case studies for goal-based investing

Previous and next articles:

<p>NRIs must file your income tax return on rental income from Indian property the right way. Learn about the tax deductions you can claim and how to file your return without hassles.</p>
NRI Tax
NRIs: How to File Your Income Tax Return on Rental Income from Indian Property

NRIs must file your income tax return on rental income from Indian property the right way. Learn about the tax deductions you can claim and how to file your return without hassles.

Published: 13 August 2023

6 MIN READ

<p>This article explains the concept of NPV - a financial tool that helps you compare investment options to use in buying insurance, SGB and in many other cases.</p>
Calculator
How Net Present Value (NPV) Can Help You Make Smarter Financial Decisions

This article explains the concept of NPV - a financial tool that helps you compare investment options to use in buying insurance, SGB and in many other cases.

Published: 20 August 2023

4 MIN READ

Latest articles:

<p>This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.</p>
House Purchase
How much EMI do I have to pay for my home loan?

This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.

Published: 29 September 2023

1 MIN READ

<p>A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.</p>
Retirement Reader Questions
How much money does this 39 year old investor need to invest per month to retire at 58?

A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.

Published: 27 September 2023

7 MIN READ

Topics you will like:

Asset Allocation (20) Basics (8) Behaviour (10) Budgeting (11) Calculator (17) Case Study (6) Children (12) Choosing Investments (38) FAQ (6) FIRE (13) Gold (11) Health Insurance (4) House Purchase (17) Insurance (15) International Investing (10) Life Stages (2) Loans (9) Market Movements (13) Mutual Funds (29) NPS (6) NRI (13) News (9) Pension (8) Portfolio Construction (46) Portfolio Review (27) Reader Questions (6) Real Estate (6) Retirement (36) Review (12) Risk (6) Safe Withdrawal Rate (5) Set Goals (27) Step by step (14) Tax (37)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

More posts...

Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.

This post titled The Ultimate Guide to Which Type of Gold Gives the Best Returns first appeared on 16 Aug 2023 at https://arthgyaan.com


We are currently at 299 posts and growing fast. Search this site:
Copyright © 2021-2023 Arthgyaan.com. All rights reserved.