Different Methods to Invest in Gold and which one is the Best for you
Something about gold has attracted civilisations worldwide from the beginning, without their cultures coming into contact. It has been a symbol of purity, power, beauty, and social status.
Gold is an excellent electrical conductor, free of oxidation, highly malleable and can be processed, impacted and moulded without damage. Gold is one commodity that can be considered a currency or monetary asset. Until recently, many currencies worldwide had been backed by gold, and the gold standard has long been abolished. Still, even in times of economic turmoil, gold is a very effective asset to preserve wealth.
Why you should Invest in Gold?
- On checking the returns over the last 11 years, we can see that gold and equities have a negative co-relation. Gold provides higher returns in years when equities have negative or below par returns.
- Gold for this reason must form an important part of investors’ portfolio diversification.
- Has historically delivered 6-9% in long term
- Hedge against inflation and equities
Returns on Gold vs Returns on Nifty
| Year | % returns in Gold | % returns in Nifty 50 |
|---|---|---|
| 2011 | 32% | -25% |
| 2012 | 13% | 27% |
| 2013 | -8% | 6% |
| 2014 | -6% | 31% |
| 2015 | -7% | -4% |
| 2016 | 10% | 3% |
| 2017 | 6% | 28% |
| 2018 | 8% | 3% |
| 2019 | 25% | 12% |
| 2020 | 28% | 15% |
| 2021 | -4% | 24% |
Source – https://www.goldpriceindia.com/
Different ways of Investing in Gold in India
Gold has a deeply rooted meaning in Indian history. Over the years, India’s enthusiasm for gold has grown stronger, and Indians make up most of the gold consumed worldwide. More than investing in Indian history, gold is a culturally important metal that has found a place in the heart and home of India. As of Dec 2021, the Indian government held 754 tonnes of gold reserves.
Buying options
- Physical Gold: Local Jeweller
- Digital Gold: Major digital gold players in India are AUGMONT GOLD, MMTC-PAMP INDIA and SAFE GOLD. Purchase of digital gold is backed by actual gold, which is then stored in bank-grade lockers, which naturally brings in a variety of costs.
- Gold ETFs: GOLD ETFs are directly backed by physical gold and invest in gold, mining, and refining companies.
- Gold Mutual Funds: Gold mutual funds are like a basket of gold ETFs, investing in multiple gold ETFs. SEBI regulates both gold ETF and gold mutual funds.
- Sovereign Gold bonds: Sovereign gold bonds are not backed by physical gold; they are derivative instruments. This means the government of India is using the price of gold as a benchmark against which it is promising to pay interest semi-annually. Sovereign gold bonds have a maturity period of 8 years, while investors can sell in the secondary market after six months. Investors also have the option of prematurely encashing the bonds after five years. Both selling in the secondary market and premature encashing entail capital gains tax otherwise not applicable.
We will compare five gold buying options side by side based on seven factors
| Parameter\ Options | Physical Gold | Digital Gold | Gold ETFs | Gold Mutual Funds | Sovereign Gold Bonds |
|---|---|---|---|---|---|
| Cost | 3% GST, design and making charges (up to 10%) and storage charges. Cost is high. | 3% GST. Technology, hedging, insurance and transportation costs lead to a 5-6% buy-sell spread. | Brokerage cost, Demat account costs and expense ratio. Total – 0.5-1%. Exit load | A bit more expensive than Gold ETFs at 0.6-1.2%. Exit load | Zero expenses, discount of 50 rupees if purchased online |
| Returns If gold prices increase by 10% | Profit on selling would be less than 5% | 5-6% due to the buy-sell spread | 8.8-9.4% depending on expense ratio and brokerage charges. | 8.8-9.4% depending on the expense ratio | 12.5%. 10% capital appreciation and 2.5% interest rate. |
| Availability | Always available | Always available | Always available | Always available | Periodically available- the list is displayed on the RBI website. Buying period of 5 days. |
| Starting Investment | 1 gram | Invest as little as one rupee. | 1 gram | As low as 100 rupees | 1 gram |
| Risk | Losses during the making, Quality tampering and theft | Lack of any regulatory oversight | The product is backed by actual gold and hence has no inherent risk | Same as Gold ETFs | Sovereign default, chances of which are very less. |
| Liquidity | High | High | High | High | Low. Maturity period and clauses on exit. |
Taxation of Physical Gold, Digital Gold, Gold ETFs and Gold Mutual Funds
- Short term capital gains if sold before 3 years. Gains are added to income and taxed as per income tax slab.
- Long term capital gains if sold after 3 years. 20% tax after indexation.
Taxation of Sovereign Gold Bonds
- Interest from gold bonds is added to the income.
- On maturity, all capital gains are entirely tax-free.
- If redeemed with RBI after 5 years and in the redemption period specified by RBI, then no tax is levied.
Investing in gold is a great option to diversify one’s portfolio while also providing steady returns and hedging against the equity markets. Digital and physical gold investments do not offer the total potential owing to their costs and should be avoided.
If needed, invest in Gold Mutual Funds and ETFs for the short term as they provide good returns and high liquidity. Sovereign Gold bonds are more suited for long term investments of 5 years or more.
We hope this articles helps you know How to Invest in Gold in India. If you need any assistance on Investments, Insurance or How To Invest In Mutual Funds Feel free to contact Wealth Baba. We will try to help you out in the best possible way.
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