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.
This article helps you choose the right type of gold for your long-term investments since all options do not give the best results.
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:
This article compares the currently active SGBs vs the latest SGB issue price to see what returns are implied for investors who are already invested.
This article explains which Sovereign Gold Bond (SGB) series should be bought from the stock market if you are planning to invest in SGB.
This article shows you how to buy Sovereign Gold Bonds (SGB) from the stock market using your demat account.
This article provides a complete history of SGB issue price history since 2015 to help investors track the how the issue price has moved over time.
This article compiles an exhaustive list of FAQs for Sovereign Gold Bonds (SGB).
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
Source: https://ibja.co/
Physical gold bar from MMTC-PAMP website
Source: https://www.mmtcpamp.com/
SGB price is the average of IBJA last week prices. We assume that:
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.
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% |
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.
SGB is the only gold investment option where:
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.
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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