In the Indian context, gold has traditionally been seen as jewellery, an investment with jewellery, a valuable asset and a product to be used in times of difficulty. Apart from its financial value, it also has emotional and social values attached to it. Today Despite having many other products, the importance of gold has not diminished and many new investment options have been added to it.
Some benefits of investing in gold
- physical asset
Gold is a physical asset class that many people like to buy and hold for the future.
- positive history
Gold has a positive history of price and price-growth. From the common people to the royal class alike, its value has been understood and tested.
- inflation hedge
Investing in gold has proved to be a sound hedge against rising inflation.
Gold is easy to buy and sell and is one of the most liquid asset classes that can be easily sold as and when required.
- simple investment
Investing in gold does not require specific knowledge, research or study from investors.
Gold is a helpful and complementary investment option to diversify the portfolio.
different forms of gold
Before investing in gold, investors should understand the difference between its different forms, which will help them understand why 24K gold costs more than 22K and 18K gold.
24 carat gold
- it is the purest form of gold
- It is not mixed with any other metal and is a symbol of 99.9% purity
- It is sold in the form of coins or bars and is not suitable for making jewelery
24 karat gold rate
Is the most, because it is the purest form of gold and there is no adulteration in it.
22 carat gold
It consists of 22 parts of gold and 2 parts of other metals. It is used for making jewelery by mixing other metals. It contains about 91.67 percent gold, hence it is also called ‘916’ gold.
18 carat gold
It is a mixture of 75 percent gold and 25 percent other metals.
It is less expensive than 24 and 22 carat gold and is used for making diamond studded jewelery due to its hardness and durability
Investing in Gold – Five Major Ways
Investing in gold has become easier over the years. It is not just limited to buying jewellery. There are five main ways of investing in it –
1. Gold ETF
Gold ETFs are Exchange Traded Funds (ETFs) that track the domestic 24 Karat gold price. These are passive investment instruments that track gold prices and invest in gold reserves. One gold ETF unit is equivalent to 1 gram of gold backed by high purity gold.
Features of Gold ETF –
- Investing in Gold ETFs requires a demat account
- The minimum investment in these is equal to 1 gram of gold
- They provide high liquidity
- The units of ETF can be traded on the stock exchange
- There is no exit load
- Gold ETFs are backed by real gold
enefits of Gold ETF –
- inflation protection
Gold ETFs are considered a good investment for returns above inflation.
It provides portfolio diversification to the investors
- global uncertainty
It is considered a good investment in times of global uncertainties
- Capital Gains (LTCG)
Gold ETFs are subject to capital gains tax (LTCG tax), so they provide better post-tax returns
- safe investment
Gold ETFs are easy to invest and safe from theft, storage worries etc.
- transparent business
These are easily tradable on stock exchanges and have full transparency in terms of pricing
Buying gold ETFs is easier than physical gold
Some Disadvantages of Gold ETFs
- Demat account opening and annual charges
- Brokerage charges while buying and selling Gold ETFs
- Not all gold ETFs provide equal liquidity
2. Gold Mutual Fund
Mutual fund schemes that invest in Gold ETFs are known as Gold Mutual Funds. They invest through ETFs instead of making direct physical investments and come under the category of ‘Fund of Funds’. These funds are suitable for investors who do not have a demat account and want to take advantage of the appreciation in the price of gold, managed professionally.
Features of Gold Mutual Fund –
- Investing in Gold Mutual Funds does not require a demat account
- Investors can invest in these through Systematic Investment Plan (SIP) which is not possible in ETFs
- These can be bought at NAV, which is calculated at the end of the trading day
- Investment can be started with a small amount in these
Benefits of Gold Mutual Fund –
- small investment amount
These can be invested in smaller amounts, unlike ETFs or physical gold
Like other mutual funds, they can be easily sold at the applicable NAV
Gold funds are regulated by the regulator Securities and Exchange Board of India (SEBI).
- safe investment
Holding gold in electronic form is one of the most secure and convenient ways
Some Disadvantages of Gold Mutual Funds
- These have slightly higher expense ratios than ETFs
- Gold mutual fund schemes invest in gold ETFs, hence the charges are twice
3. Sovereign Gold Bond
To reduce the demand for physical gold, the ‘Sovereign Gold Bond’ scheme was launched by the government in 2015. RBI issues them on behalf of the Government of India.
Features of Sovereign Gold Bond
- These are government securities issued in the form of bonds at par with the per-gram market price of gold
- This is a relatively safe way to invest in gold
- No issues with making or storing
- These can be traded on the stock exchange
- These are available at Indian Commercial Banks (branches or online), Post Offices, NSE and BSE
- Maturity period is 8 years (with exit option after 5th year)
- In these, the investment limit (for retail investors and HUF) is minimum 1 gram and maximum 4 kg.
Benefits of Sovereign Gold Bond –
- interest income
These Bonds carry a fixed interest rate of 2.50%, payable semi-annually. There is no substitute for earning this type of income from any other type of investment in gold.
- at maturity
The maturity value of the Gold Bonds is based on the average of the last three days closing price of gold of 999 purity at that time. (This quote is published by Indian Bullion and Jewelers Association Limited)
Bond-holders can take a loan against these bonds. The loan amount is dependent on the pricing procedure suggested by the RBI.
The interest earned on the bonds is taxable under the Income Tax Act, 1961. But the capital gains arising at the time of maturity (LTCG) are fully exempt to the investor, which makes it an attractive long-term option.
Some disadvantages of Sovereign Gold Bond –
- Maturity of 8 years is long for some investors
- There is a minimum lock-in period of 5 years
- Minimum investment is 1 gram of gold
4. Digital gold
One of the convenient and cost-effective means of investing in gold online is Digital Gold. Digital gold is a way of holding virtual gold without a vault or locker.
Digital gold purchased by investors is backed by physical 24-karat gold and is linked to the rate of 24-karat gold.
Some features of digital gold –
- small investment
Investors can invest with very small amount
Most companies selling digital gold ensure that it is stored in secure vaults and is insured
Investors can sell it anytime and get their money back
- generation fee
Unlike jewelry or other gold alternatives, digital gold has zero manufacturing charges
Some disadvantages of digital gold –
-Not regulated by any body
-There is an investment limit of Rs 2 lakh on most platforms
5. Physical gold
Investors who prefer to buy gold only in physical form and want to hold it for a longer period of time can do so by buying gold coins or bars. Investors should buy these from reliable and verified sources only. Gold coins and bars come with 24K purity and their value is linked to the rate of 24K gold. These come in standard units such as 1 gram, 5 grams, 10 grams (or more). Investors should ensure their purity (with hallmark) in compliance with BIS standards.
benefits of physical gold
- it’s an easy investment
- Demat account is not required
- There is no brokerage or management fee
- Loan can be availed easily when required
Some Disadvantages of Physical Gold
- risk of theft or loss
- May have higher storage costs
- purity of gold has to be ensured
gold jewelery and savings plan
These two more options related to gold are a popular means of investment, purchase and accumulation in India –
benefits of gold jewelery
- Gold jewelery has a special place in most homes in India
- Because it is a valuable metal, its safety has always been a matter of concern.
- Gold jewelry making charges may be higher for special designs
- These charges become irrecoverable when the jewelry is sold.
gold savings plan
Jewelers and big jewelers come up with installment plans for investing in gold. In this, a pre-determined amount is deposited every month for a specific period. At the end of this period, gold equal to the amount deposited (at that time price) can be purchased. Many plans also offer bonus or waiver of one installment (depending on the terms of the plan).
Things to keep in mind before investing in gold
The price of gold is determined by many factors, such as – demand and supply, economic condition of the country, demand for gold in the global market, etc. Gold is considered auspicious in India and is bought on different occasions like Diwali, Akshaya Tritiya, weddings. The general belief is that gold prices move in a different direction than the stock market, so it Good investment vehicle – but it should not be a major part of the portfolio.
Like any other investment vehicle, before investing in gold, it is necessary to assess the objective, duration, risk appetite and future strategy.