Apna Time Aayega! (gold vs mutual funds)

When I see the meteoric rise in gold prices and compare it with the recent fall in mutual fund NAVs, the first line of the Gully Boy song starts off in my head. Then people start off that old litany – “See, gold is a safe investment. I knew mutual funds would never be able to sustain”. Once again, I want to shake them and point out that if they are just looking at absolute returns, their assessment is wrong. To truly understand the returns and to compare asset classes, you have to look at the compound annual growth rate.

Date	Gold Price per 10 grams	1Y Return	3Y CAGR	5Y CAGR
16-Sep-14	28,010
16-Sep-15	26,345	-5.9%
16-Sep-16	30,916	17.3%
15-Sep-17	30,855	-0.2%
17-Sep-18	31,680	2.6%	6.3%
16-Sep-19	39,120	23.4%	8.1%	6.9%

From this chart, we can see that gold prices have been flattish for the previous four years and then there has been a sharp rise over the last year. This means if you bought gold 1 year back, you would have got a whopping 23.48% return. However, if you bought gold 3 years back, your year on year return would be 8.16% and if it was 5 years back, it would be just 6.91%.

In my earlier article, I had written about physical gold and its attributes as an investment. To briefly summarise it

• I would encourage people to buy gold as it is good to diversify investments across asset classes (I believe in diversification, that’s why I promote mutual funds
• It’s difficult to store and safe guard physical gold so one cannot buy large quantities
• Jewellers offer 11-month instalment schemes to buy gold. These are convenient but there is no real recourse if the jeweller fails so choose the jeweller carefully

Now, if you don’t want the hassles of storing physical gold, gold exchange-traded funds (ETF) may be the perfect solution. In 2002, the idea of a gold ETF was conceptualised. Their features are

• these are funds that buy physical gold (of 99.5 per cent purity)
• the units of gold ETFs are traded in exchanges

Simply put, you can log onto your demat account and buy units of a gold ETF. The fund uses your money (and of other investors) to buy physical gold. Your advantages are

• invest in gold without storage hassles
• guaranteed purity (each unit is backed by physical gold of high purity)
• listed and traded on stock exchanges
• one can purchase as low as one unit (which is roughly 1 gram)
• transparent and real time gold prices.
• tax efficient if you hold for more than three years
• no fear of theft, units are held in demat form
• no entry and exit load

For those of you who are wondering if this actually works, take a look at the performance of SBI Exchange Traded Gold Fund (data from valueresearcholine.com)

SBI Exchange Traded Gold Fund

Performance

	YTD	1-Month	3-Month	1-Year	3-Year	5-Year	10-Year
Fund	22.02	-0.13	16.99	25.43	6.06	6.67	8.16
Domestic Price of Gold	22.72	-0.07	17.21	26.59	7.19	7.78	9.25

You can see that the returns are mirroring the year on year returns you get from gold (returns mentioned against gold are not factoring in any charges and hence they are slightly higher).

At this point either you’ve had enough of this gobbledegook or you’ve asked the pertinent question – how does this compare with a mutual fund? Let’s look at the performance data of SBI Blue Chip (large cap) fund (data from valueresearcholine.com)

Performance

	YTD	1-Month	3-Month	1-Year	3-Year	5-Year	10-Year
Fund	0.83	-0.45	-6.11	-2.18	5.10	8.54	10.81

Compared to gold, the fund has fared badly in the last 1 year. It has returned slightly lesser in 3 year comparison. However, across 5 year and 10 year comparison, it has done better. Remember when the markets had peaked in May 2019? At that time, the mutual fund returns would have looked much better. In the coming months, you can expect the returns to go down.

So you see why it is important to diversify. Now gold is up and equity mutual funds are down. FDs and ultra short term debt funds give consistent but low returns. Allocate your funds wisely and you will see that ‘apna time aata rahega’ J If you want to know more about personal fund allocation, gold ETF details or just have a chat on financial planning, drop me a line at mathewpravin@yahoo.com and I'll get back to you.

You have only 5 months left.....

….. to plan your tax saving and execute it. Yes, that’s true. By the time you read this article, get down to planning and deciding which instruments to invest in and start off, it will be September. Then you have time till January to make those investments because come February, the HR folks are going to get behind you for producing proofs. 

You already know what the the toughest part is. Not the planning or execution but actually getting down to it. It used to happen to me too. When I started working, I found the tax declaration form very intimidating. Not only was it long and complicated, it made me feel as though there were many avenues of saving but all I was doing was spending. It took me a couple of years to figure out that I didn’t have to put money into each of those investments and again a couple of years to figure out that only some investment avenues were suitable for me. So I’m going to highlight the sections applicable to most people to help you get started.

Sec 80C
Let’s look at Sec 80C first. Grab a pen and paper and answer these questions (Financial Year FY 19-20 refers to the period between April 1, 2019 and Mar 31, 2020)

A. Do you have children? If yes, do you pay school fees? If yes, note down the amount payable for FY 19-20
B. Do you have a home loan? If yes, ask your bank for a provisional principal repayment certificate for FY 19-20 and note that amount down.
C. Ask your HR for the EPF (Employee provident fund) amount that will be paid on your behalf for FY 19-20.
D. Do you already pay life insurance premium / tax saver mutual fund / any other tax saving investment? If yes, note the annual payment. 

The maximum saving you can do under Sec 80C is Rs 1.50 lakhs. If you’ve put in money in any of the above, they are eligible for tax saving. Now total these amounts and deduct from Rs 1.50 lakhs. The derived amount is the maximum you can save under this section. Divide it by 5 (because you have 5 month left), choose an instrument you wish to invest in. stay away from ULIPs) and pay the amount every month from Sep to Jan.

Sec 80D
From here on, things get simple. Have you availed health insurance? If yes, note the premium amount. If any of your parents are covered under the policy and if one of their ages is above 60 years, you can claim up to Rs 50,000 premium paid for tax deduction. If the eldest member is less than 60 years of age, you can claim up to Rs 25,000. 
Also note the cost of any preventive health check-up can be submitted for tax deduction up to Rs 5,000 total.

Sec 80E - Do you have an education loan? If yes, you can offset the interest cost for tax benefit.

Sec 24(B) - If you do have a housing loan, ask your bank for a provisional interest payment certificate for the FY. You can claim up to Rs 2.00 lakhs interest payment as tax deduction.

The above sections are the ones which are applicable to most people. Apart from these, if your answer is yes to any of the following, then you can claim tax benefits
Do you donate money?
Is anyone in your family including you) handicapped or availing medical treatment?

If you need a more detailed explanation, this article by Basavaraj Tonagatti  is really goodhttps://www.basunivesh.com/2019/04/30/best-tax-saving-options-for-2019-20/  

That’s it folks. Remember that investments need to be made for investment sake and not for tax saving. So choose the best instruments to invest, check for diversification and then see how it fits into your tax planning. If you want to discuss this further, drop us a line at mathewpravin@yahoo.com and we can have a chat to fine-tune your planning.