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Sovereign Gold Bond – Why Is It A Better Option than Physical Gold Investment? 

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Sovereign Gold Bond – Why Is It A Better Option than Physical Gold Investment? 

In India, for a very long time now, investing in physical gold is a practice that is followed. In fact, in many states in India, it is hard to see marriages without gold ornaments worn by brides. When investing in gold is considered auspicious physical gold comes in handy. But, for those interested in choosing gold as an investment for the future, sovereign gold bonds come in handy. What are they and how are they the best option compared to physical gold? Let us find out here:

Meaning of Sovereign Gold Bond

Sovereign Gold Bond shortly referred to as Sovereign Gold Bond is a gold bond. The Reserve Bank of India issues this bond as a representative of the Government of India. The good thing about this bond is that gold in this bond is sold on a per-unit basis similar to physical gold. Above all, the value of these bonds is derived from the underlying value of one gram of physical gold. Particularly, the value of physical gold with 999-purity is considered for deciding the price of one unit of a sovereign gold bond. 

The actual cost of the bond is calculated by taking an average of the closing prices of physical gold for the past three working days. But, from where does RBI arrives at the closing prices. These are prices that the Indian Bullion and Jeweler’s Association Limited publish every day. Even, the redemption value is arrived at on the latest base data from this source.

Is It Easy To Buy Sovereign Gold Bonds?

You can easily buy sovereign gold bonds. Also, you can keep them deposited for 8 years at an interest rate of 2.5% per annum. You will get the interest credited to your associated bank account on a half-yearly basis. There is a restriction of buying 4 kgs of gold bonds per year for a person. In the case of a trust, this restriction is 20 kgs per year. Are you wondering about any mandatory documents needed for SGP purchase? All you need is only a PAN card. Without your PAN card copy, you cannot buy these bonds.

Benefits of Investing in Sovereign Gold Bond:

Here are the benefits you can expect from this investment:

  • Assured safety, which is not possible in physical gold
  • An additional source of income as you can get the interest credited to your bank account
  • You can gain an edge against inflation as the value of your bonds will increase similar to the physical gold cost.
  • You can buy these bonds easily online
  • You can get indexation benefit if you wish to transfer the bond before the maturity
  • You can easily trade these bonds on stock exchanges
  • Sovereign Gold Bonds are accepted as collaterals for loans by banks

So, as compared to physical gold, sovereign gold bonds carry many benefits to investors. But, it is better to go through a comparative study of Sovereign Gold Bond and physical gold. In turn, you can arrive at an informed decision that the former is better than the latter:

Comparing Sovereign Gold Bond and Physical Gold:

Criteria  Sovereign Gold Bond Physical Gold
Meaning These are government securities with dependable 999-purity Gold ornaments can be made only when copper is mixed. So, you cannot ensure the utmost purity of physical gold
Rate The issue rate is decided by the government The rate keeps changing every day
Lock-in period 5 years lock-in period There is no lock-in period. You can buy and sell anytime.
Investment You can buy gold bonds in units. One unit is equivalent to one gram of gold. You have a restriction on the utmost grams you can buy. An individual cannot buy more than 4 kgs of gold per year. If you are particular about buying physical gold, you can buy coins and biscuits available in 10 grams denominations. So, you will have to spend more to buy even a single coin or biscuit.
Taxation Capital gain on redemption is zero in Sovereign Gold Bond. Even, long-term capital gains come with indexation benefits. Nevertheless, the capital gains on premature redemption are taxable at the same percentage as physical gold The capital gains from your investment in physical gold held for less than three years are taxable based on your tax slab. For an investment held for more than three years, you will be taxed at 20% with indexation benefits.
Liquidity It is not liquid as you can trade your Sovereign Gold Bond in stock exchanges only after 5 years of the lock-in period. You can buy physical gold from any jeweler or even from banks these days. You can even exchange through the same jeweler or a different jeweler at any time without any lock-in period.
Demat Account Not compulsory. Nevertheless, you have the option to hold your Sovereign Gold Bond units in a Demat account. Not required

Conclusion:

In short, if you are looking for liquidity, buying physical gold will be a good idea. Nevertheless, if you are fine with the lock-in period and look for the best returns, Sovereign Gold Bonds can the right choice!

Best Tax Saving ELSS Mutual funds To Invest in 2022?

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Best Tax Saving ELSS Mutual funds To Invest in 2022?

What are ELSS Mutual funds and how can ELSS Mutual funds help you grow your wealth? Let us find out here:

“Do not save what is left after spending but spend what is left after saving.” 

Thanks to the mentality to save instilled right from a young age in India! When talking about the opportunity to save, we have different options. One such option is Tax-Saving Mutual Funds. These are shortly referred to as ELSS. 

What Are Tax-Saving Mutual Funds?

These are diversified equity funds. The money you invest in these funds is invested in stocks. These investments are made in particular proportion based on your investment goals. Tax-saving mutual funds are similar to any other types of mutual funds. But, the difference is that your investment in these funds will bring you tax benefits. In particular, you can get exemptions under section 80C. 

What Makes ELSS Mutual Funds Special?

In Tax-Saving Mutual Funds, your fund manager will choose stocks after carrying out in-depth market research. He will carry out this research to deliver the utmost risk-adjusted portfolio returns to you. As compared to other investment options, the ELSS stands unique. One of the key factors that make it unique is the short lock-in period of three years. 

Why Should You Consider ELSS or Tax Saving SIP?

 

Choosing these funds for your investment is a good idea. The reason is that they can make you eligible for a tax deduction of up to Rs.1.5 lakh. You can claim this deduction under 80C section of the IT Act. In turn, you can bring down your tax liability. The reason is that the amount you invest in these funds is deducted from your taxable income.

Here are some key features that make ELSS special:

  • ELSS Mutual funds invest a major portion of your funds in equity. To gain a better understanding about equity, you can visit our Mutual fund article.
  • ELSS Mutual funds have a compulsory lock-in period of three years. This is the shortest period among the other tax-saving instruments in the market.
  • Apart from tax-saving benefits, they can bring you capital appreciation from your investment.
  • Do you wish to get regular income from your ELSS Investment? You have the option to choose dividend pay-outs. Otherwise, you can also choose capital appreciation to get funds in a lump sum for your future.
  • You are relieved of exit or entry load when you choose ELSS as your tax-saving option
  • In the long run, you can expect 10-12 per cent returns. You can get this when you choose good ELSS funds for your investment. These returns are the highest in the tax-saving category of instruments. Nevertheless, ELSS carries some risk as well due to equity investments. 

Tax Benefits You Can Expect from an ELSS Investment:

You can claim a deduction under section 80C of the Income Tax Act for the principal money you invest in an ELSS scheme. You can claim a deduction of up to Rs.1.5 lakhs as per this section of the IT Act in India.

save tax build wealth ELSS

As mentioned earlier, ELSS Schemes have a compulsory lock-in period of three years. So, when you redeem, you will get long-term capital gains from these schemes. The good thing here is that these gains are not taxable. However, this exception is applicable only until Rs. 1 Lakh per financial year. Any gains more than this value will be taxed at 10% without indexation.

Benefits of ELSS over other Investment Schemes:

Are you wondering whether to choose ELSS or other investment schemes? Then, understanding the benefits of this investment option as against others will help you decide:

  • ELSS has the shortest lock-in period compared to PPF, NSC and SCSS
  • Potentially higher returns as the returns are market-linked. But, in other schemes like bank FD, you can expect only a fixed return.
  • You can expect better post-tax returns from ELSS Schemes. Many investors were able to get long-term capital gains of Rs. 1 lakh per year from these schemes.
  • ELSS schemes can help you with wealth-generation. Do you know how? The corpus funds that you generate from these schemes can help meet your financial goals.

Comparison of ELSS with Other Tax-Saving Schemes:

You can gain a better idea of the benefits of ELSS over other schemes from the table below:
Investment Instrument Tax Free Gains Returns Lock-in period (in  years) Risk/Safety
Employee Provident Fund Yes 8.50% Until 60 years Low Risk
National Pension System Partially Variable Until 60 years Moderate Risk
Life insurance premiums Yes Variable At least 5 years Moderate Risk
Equity Linked Savings Scheme (ELSS) No Market-Linked 3 years High Risk
Bank FD No 6.20% 5 Years Low Risk
PPF (Public Provident Fund) Yes 7.1% 15 Years Highest Safety
NSC (National Savings Scheme) No 6.8% 5 Years Highest Safety
SCSS (Senior Citizens Savings Scheme) No 7.4% 5 Years Low Risk

Source: SBI Mutual Fund

Investment Mode:

When you choose to invest in Tax-Saving Mutual Funds, you have two choices. You can choose SIP or lump sum mode.

As stated in our SIP Vs. lump sum mode article, SIP investment could be the better choice in most instance. Nevertheless, you can choose lump sum mode when the market is in bearish trend. Also, you can do this when you are ready to invest for a longer. Also, choose lump sum mode only when you are ready to take higher risks.

Who Should Invest In ELSS Schemes?

Now, you know that ELSS schemes are beneficial in many ways. However, the returns are market-linked. It means that based on the market, the returns can either increase or decrease from the money you invest. So, it is a high-risk investment. It is the most suitable investment option for aggressive investors, who are particular about wealth creation in the long run. 

As these schemes carry a lock-in period, you should be ready to stay invested for three years. Also, you should make your financial plans accordingly. To save taxes, investors in higher tax brackets can benefit from these schemes for sure. Also, without the benefit of indexation, gains of more than Rs.1 Lakh are taxed at 10%. So, if you have long-term financial goals, you can choose this scheme. Using this investment, you can plan for your child’s education and even your retirement.

What is NAV (Net Asset Value) in Mutual Fund?

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What is NAV (Net Asset Value) in Mutual Fund?

As we discussed in our mutual fund article, the units allocated into an account are based on the NAV of that mutual funds. Today we’ll see what NAV is, how it is calculated and how it affects the money invested.

  1. NAV = Net Asset Value?

    In very simple terms, NAV is nothing but the price you pay to buy the unit of mutual funds. So, if the Net Asset Value of a mutual fund is 22.85, that simply means you would need to pay Rs 22.85 to purchase one unit of that mutual fund. Most of the time, the unit cost of mutual funds begin with Rs. 10 and increase as the assets under the funds grow. Going by this rule, the more popular a mutual fund is, the higher is its Net Asset Value. But of course, it is not an indicator of whether or not a fund is good or bad, or rather cheap or expensive. There’s a whole list of things that you should look for when you are purchasing a mutual fund or SIP.

     

  2. How Net Asset Value calculated?

    The calculation of NAV is pretty simple and straightforward. It has a very basic formula, that is NAV = (Total asset – total liabilities)/ total outstanding shares It is calculated based on the day’s closing prices for each individual asset. So at the end of every day the NAV is updated, after the stock market closes at 3:30 pm. The market reopens the day after with the closing prices of the previous day. The fund houses accordingly deduct all the expenses to get the net valuation of the assets for the day, using the formula mentioned above.

  3. How is NAV relevant to investors? Is low NAV good or high NAV good or bad?

    A lot of investors think net asset value is similar to a stock price. This causes them to believe that a fund with a lower net asset value is cheaper and hence, a better investment. In truth, it is not an indicator of mutual fund performance. A lower value alone does not make a fund a better investment or vice versa. Hence, it should not be the only determining factor to choose a mutual fund. So, Net Asset Value doesn’t really reflect a lot when it comes to fund selection and just one of the parameters that you (term audience as investor),. There’s a whole bunch of things that you should consider before selecting a fund for investment.

What is SIP | Why Should Invest in SIP?

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What is SIP | Why Should Invest in SIP?

This is a continuation, or rather an extension of our previous article, what are mutual funds? If you are well aware about what mutual funds  are, how do they work, what are pros and cons of investing in mutual fund, Then you can go right ahead with this article, otherwise we would recommend reading the post about mutual funds, first clearing concept about mutual funds and then moving on here.

  1. What is SIP (Systematic Investment Plan)?

    SIP stands for Systematic Investment Plan. What it actually is nothing but a fancy word for EMI in savings. That’s right, have you heard the phrase, “boond boond se ghada bharta hai”. That’s exactly what it means. Just like when you don’t have enough water to fill the entire vase, but every single drop is an addition to make it full. But the subtle thing here is discipline, a continuous process of saving rather than just one shot of saving.

  2. Why Consider Systematic Investment Plan?

    SIP enforces you to make a habit of saving, and that’s a really good thing. We all have expenses, and we all get greedy sometimes. Oh! A sale is coming on Amazon, let’s buy that new smartphone, we’ll save next month. What? A new restaurant is opening, but short of funds, oh well! We can save money next month, so let’s try the restaurant first. What about that new Avengers movie that just launched? Or a trip to Kerala? So, for one reason or another, if we don’t make a habit, and more important, we don’t enforce that habit, then we skip the saving and our well will never get full.

    With SIP, you can set up an automatic system, that once every month (or every week, or based on any frequency that you select), that particular amount will be auto debited from your account and invested into the mutual funds of your choice, and basis the nav, a certain number of units will be  allocated to your account. So, once you set up the SIP, you don’t have to remember about saving, and it is automatically done on your behalf, forcing you into a habit of saving. Of course, you always have the option to manually pause or stop the SIP in case of some emergency, but you should not get into the habit of doing that as that would defeat the whole purpose of systematic saving.

  3. Systematic Investment Plan (SIP) vs One Time Investment

    You always have the option to invest/save all your money at once but that may not be as efficient as the other option. They both have their own use, and you can’t replace one with another. One time investment is the best option when you have a bunch of money and you want to invest all that in savings. But that does not mean you should not start a SIP, because as we just explained, SIP enforces a habit of saving. As units allocated to your demat account are based on the nav, averaging out over a period of time is more. Let’s understand with an example.

  • Principal -> Rs 10,000
  • Current Price -> Rs 500
  • Scenario one -> one time investment -> units allocated at once -> 20
  • Scenario two -> invest Rs 1000 per month
    • Month 1 ->
      • Price -> 500
      • Untis allocated -> 2
    • Month 2 ->
      • Price -> 550
      • Units allocated -> 1.82
    • Month 3 ->
      • Price -> 487
      • Units allocated -> 2.05
    • Month 4 ->
      • Price -> 440
      • Units allocated -> 2.27
    • Month 5  ->
      • Price -> 387 ->
      • Units allocated -> 2.58
    • Month 6 ->
      • Price -> 423
      • Untis allocated -> 2.36
    • Month 7 ->
      • Price -> 498
      • Units allocated -> 2.00
    • Month 8 ->
      • Price -> 530
      • Units allocated -> 1.88
    • Month 9 ->
      • Price -> 512
      • Units allocated -> 1.95
    • Month 10  ->
      • Price -> 490
      • Units allocated -> 2.04
  • Total units allocated => 2+1.82+2.05+2.27+2.58+2.36+2+1.88+1.96+2.04 = 20.96

As you can see, with one time investment, we get the units based on the price at that point, but when we spread out the money over a period of time in SIP, then we might get more units (of course, we could also get less units, if the price only goes up in the subsequent times, but as we suggested in our article about mutual funds, the SIP and mutual funds are a long term investment, and in the long term the price goes up and corrects in a pattern.

In conclusion, SIP is one of the best ways to start saving for the long term. Check out our article on how to start a SIP in zerodha.

What is Mutual Funds, All About Mutual Funds in Simple Words?

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What is Mutual Funds, All About Mutual Funds in Simple Words?

  1. What are mutual funds?

    Simply put, mutual funds are nothing but a savings tool, just like a lot others, FD, RD, LIC etc, that help you grow your investment much better than savings in a bank.

    In a more defined manner, as stocks are traded in the stock market. Mutual funds are a collection of certain stocks, so instead of picking stocks yourself, there’s a dedicated team of people who do the hard work for you, and create a portfolio of certain stocks, so you can then invest a certain capital and based on the NAV a certain number of units are allocated to your account, to understand better about nav and how units are allocated, do check out our article about nav.

    These were just simple definitions, let’s look at some of the more official definitions.

    Investopedia: “A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.”

    Wikipedia    : “A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities.”

    Not so intuitive, right? So, for now, let’s just stick to our definition of the mutual fund, and in the upcoming section we’ll get a much clearer picture of what they are and how they differ from other saving options.

  2. Why to invest in mutual funds?

    Now this is an important question and it will also help us understand what mutual fund are more clearly. What should you invest in mutual funds? As we have already seen there are multiple reasons not to keep your money sittle idle in your bank account. Mutual funds are one of the ways to diversify your portfolio, allowing you to get much better returns than you would ever have in your savings account.

    So, that’s it! To get more returns, and two diversify your portfolio.

    The first reason is pretty simple, everyone wants more return on their investment, so no need to explain that. But the second point about diversification, that is covered in more detail in our article, diversifying your portfolio. But even if you focus on the first point, without worrying too much about the second point for now, read on to what are the pros and cons of investing in mutual fund.

  3. Advantages and Disadvantages of Mutual Funds in India?

    Just like every coin has two sides, so there are pros and cons of mutual funds. We have covered the benefits already in the second point. But there are also certain things we need to be careful of when investing money in mutual funds. The biggest downside is that since most of the mutual funds are market based, if due to any reason, the market is falling down, and the mutual fund that you’ve purchased has some allocation in the shares which are decreasing, then it may impact the nav and you may result in loss. Then? What’s the solution? Well the solution is that mutual funds are more of a long term investment, so in the long run, (about 5 to 10+ years) mutual funds will give you more and better results in almost all of the cases. Again, we are not saying in all the cases, because anything that is related to the market can’t ever be 100% certain. But the probability of that worse case scenario is very minimal, and is extremely unlikely to happen. How unlikely? Click here to find out the times when markets had the most fall in history. But as is evident from today’s market, eventually the markets will rise up in the long term.

  4. Types of Mutual Funds:

    Mutual funds can be categorized based on many things, the lock in period, the type of area where money is invested.

    Based on structure:

    Open Ended -> No lock in period
    Closed Ended -> Units are locked for some time
    Interval funds -> A cross between open-ended and closed-ended funds

    Based on asset class:

    Equity funds -> Major investment is done in equity
    Debt funds -> Major investment is done in the debt sector, such as government bonds.
    Hybrid funds -> This is a hybrid approach where some of the investment is made in equity and some is invested in the debt market.

    Based on investment goals:

    Growth Funds -> Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds
    ELSS (Tax saving) -> Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds
    Liquidity-based funds -> Funds that are targeted towards maintaining liquidity so that there is no lock in period and units can be sold whenever cash is needed.

     

  5. How To Invest In Mutual Funds In India?

    There are various options to invest in mutual funds in India, from banks to brokerage houses. These days most of the banks have the option to directly invest in mutual funds. You can also open an account in zerodha, and start a SIP, or in any of the top brokers. Zerodha actually has a completely separate app for managing mutual funds, and that is coin, so is with many other brokers as well.They all may differ slightly in UI design, but the basic set of operations is the same. You open the app, search and select the mutual fund in which you want to invest, and place an order, that’s it! To check out a graphical tutorial of purchasing mutual funds or placing a SIP in zerodha and upstocks, check out our article here. 

  6. Best Mutual Funds To Invest In 2022 India.

    Best mutual funds in India, as per value research online:
    – SBI BLUE CHIP Fund (one of the best in growth, long term)
    – Axis Liquid Fund (one of the best in liquid funds)
    – Axis Long Term Equity (one of the best in ELSS/tax-saving)
    – Axis Gilt Fund (one of the best in debt fund)

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