If a middle class family wants to save 5%-10% of their income consistently through monthly ECS payment for min 10 years to max 30 years, what are the risk free options (other than PF/PPF/VPF/NPS/Post Office Schemes)?
First let us look at the Pros and Cons of PF / PPF / VPF / NPS / Post Office Schemes
These are secure, government guaranteed, long term investment options, which also give you tax saving. You need to look for an alternative, if you meet one or more of the following scenarios.
You have already reached the Income tax deduction limit of 80C and 80CCD.
You don’t like the lock-in period and or withdrawal restrictions and you want the flexibility to exit the investment any time, for any reason.
You are not happy with the returns. The interest rates have gone down over the years. The downward trend in interest rates is only going to continue. After adjusting for inflation, the real return from these schemes are in fact negative.
Alternative 1 : Passive Index funds
A monthly SIP on Passive index funds over the long term of 10-20-30 years, is one alternative. The indexes mirror the performance of the stock markets (and the economy in general) and hence are likely to offer better returns than PF. While they are less risky than individual mutual funds, they are still subject to market risks, overall performance of the economy, geo-political uncertainties and extreme events.
Alternative 2: Gold ETF
Gold ETFs are mutual funds, whose NAV prices are linked to Gold prices. They are well protected against inflation. However, in India, GOLD ETFs are not 100% backed by physical gold. The allotment is given in mutual fund units and there is no legal right to claim physical gold against your investment.
Alternative 3 : Physical Gold Coins and Bars
Making Charges, Uncertainty over Quality, Risk of Theft, Discounted price at the time of selling.. these are some of the disadvantages of buying coins and bars for investment.
Alternative 4 : Gold stored in a SEBI approved Exchange locker
This is a very interesting alternative that is emerging in the Indian market. Let us look at the pros and cons:
Assured and Certified 999 Quality, enforced by SEBI regulations.
No Making Charges or Wastage.
No risk of Theft or Burglary. Covered with Insurance.
Legal right to take possession as physical gold bar/coin.
Brokerage fees are similar to mutual funds (Example 1%).
You can sell and exit any time. No lock in period or conditions for withdrawal.
No discount on price at the time of selling. You get the full value at market price
Every gram of Gold you own, is traceable with serial numbers of coins/bars and is physically stored in a SEBI Regulated Warehouse and is under the control of the SEBI regulated exchange.
While there can be no guarantee for the price of the gold, there is absolute government guarantee (through SEBI and the Exchange) for the number of grams stored in the warehouse.
You can save through a monthly SIP (ECS/eMandate) for any duration from 3 years to 30 years. You can add more SIPs or modify the SIP amount any time.
Protects your savings from your own spending habits. Because we won't sell gold for ordinary expenses. But we won't mind selling it for buying property or paying college fees. Thus our long term savings will truly reach our children.
Currently SEBI approved Gold can be bought and stored only in the MCX exchange. NSE and BSE are also planning to launch similar gold products (called EGRs).
3% GST is applicable as you are buying and storing physical gold (not a mutual fund). But if you are investing for 10-20-30 years, this is not a big cost, compared to the returns. For example Gold price increased from Rs 500 per gram to Rs 5000 per gram in the last 20 years. 3% GST on buying price (Rs 15) is very small compared to the appreciation at the time of selling (Rs 4500).
How to open a Gold Investment Account?
Currently the minimum quantity of purchase and storage that you can do through a MCX broker is 1 gram. So you need a Fintech App like milliGOLD to purchase in milligrams, which are then accumulated and converted to whole gram coins/bars and stored in the MCX Exchange warehouse.
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Gold prices are very volatile in the short term. Never consider Gold for short term investments, unless you want to use the accumulated gold grams to buy Jewellery, in which case the price fluctuation would not matter as you are only converting it from one form to another. This is a general opinion article and does not constitute financial or investment advice.
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